By Manolo Serapio Jr
SINGAPORE (Reuters) - Gold jumped 1 percent on Wednesday after dropping to a seven-week low the session before, with Federal Reserve Chair Janet Yellen indicating flexibility in raising U.S. interest rates.
The dollar weakened after Yellen held back from giving a clear view on when the Fed may begin hiking rates, fuelling a rally in precious metals with silver rising more than 3 percent and palladium hitting a six-week high.
China's return from a week-long Lunar New Year holiday also buoyed gold prices, with premiums on the Shanghai Gold Exchange rising.
Yellen said on Tuesday that while the Fed is preparing to consider rate hikes on a "meeting-by-meeting basis", an increase is not likely for at least the next couple of meetings.
Gold rose as the overall tone of Yellen's comments was "a bit dovish", said Howie Lee, investment analyst at Phillip Futures.
"But we don't think this rally will be sustainable. Yellen also made it abundantly clear that the U.S. economy is recovering and she will be looking to normalise interest rates at one point. In the longer term that doesn't spell much optimism for gold."
Spot gold was up 1 percent at $1,211.40 an ounce by 0638 GMT, after hitting its weakest since Jan. 5 on Tuesday at $1,190.91.
U.S. gold for April delivery rose 1.1 percent to $1,211 an ounce.
Lee sees $1,230 as the initial resistance level for gold, but predicts the metal could test $1,100 this year.
A U.S. rate hike, which would be the first since 2006, reduces the appeal of non-interest bearing assets such as gold.
"Overall, the Fed is still on track to lift its policy rate this year. June or September remains on the table," Mizuho Bank said in a note.
Yellen is likely to take the same stance she made before the Senate Banking Committee when she testifies before the House Financial Services Committee on Wednesday.
In China, premiums on the Shanghai Gold Exchange rose to $5-$6 an ounce over global spot prices from $3-$4 before the New Year break there that began on Feb. 18, reflecting firm demand from the world's No. 2 gold consumer.
Silver, both spot and U.S. futures, jumped over 3 percent at one stage. Spot palladium rose as much as 1.4 percent to $801.40 an ounce, its highest since Jan. 14. Platinum advanced 1.2 percent to $1,172 per ounce.
(Reporting by Manolo Serapio Jr.; Editing by Joseph Radford and Subhranshu Sahu)
