By Chris Prentice and Jan Harvey
NEW YORK/LONDON (Reuters) - Gold extended its rally to a three-month high on Friday, leaping toward its biggest one-year rise in seven years as a wilting U.S. dollar, political tensions and receding concerns over the impact of U.S. interest rate hikes fed into its rally.
Gold's gains coincide with the greenback, in which gold is priced, sliding toward its worst year since 2003, damaged by tensions over North Korea, the Russian scandal surrounding U.S. President Donald Trump's election campaign, and persistently low U.S. inflation.
The dollar index (DXY) touched three-month lows on Friday, lifting bullion to its highest level since late September at $1,307.60 an ounce before paring gains.
Strong charts, the weaker dollar and expectations of bullish fundamental factors ahead have bolstered gold prices in year-end trade, said David Meger, director of metals trading for High Ridge Futures in Chicago.
Spot gold prices
"Going back to the last Fed meeting with its slightly more dovish tone, commodities markets have gotten a bit of a green light," Meger said, referring to indications this month that the U.S. central bank will keep its rate outlook unchanged in the coming year.
"This recent bout of weakness in the dollar certainly is fostering a commodities rally and we’ve seen a light downturn in equities as well."
The metal will be vulnerable next year to a rebound in the currency, as well as any gains in yields, ABN Amro analyst Georgette Boele said. The opportunity cost of holding non-interest bearing bullion increases when yields rise elsewhere.
Gold's chart signals look positive after it broke above its 100-day moving average this week at $1,295 an ounce, ScotiaMocatta's technical team said in a note, pointing to a target of October's high at $1,306.
Among precious metals, palladium posted the strongest rise this year, climbing 57 percent as concerns grew over availability after years of deficit.
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Silver