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Gold posts weekly gain on short covering, technical buying

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Gold rose nearly 1 percent to a two-month high on Friday, and bullion posted its biggest weekly gain in five weeks as disappointing U.S. data dimmed hopes for a swift economic recovery.

Silver rose 1.5 percent for an eighth consecutive daily gain. The grey metal has sharply outperformed gold and was up 14 percent this week for its biggest weekly rise in almost five years.

Gold's appeal as an investment hedge increased after U.S. economic reports on Friday showed weaker consumer confidence in August and lower-than-expected residential construction last month.

Friday's data suggested that a recent spike in interest rates, in anticipation of the U.S. Federal Reserve scaling back its massive bond purchases as early as next month, was starting to have an impact on households, analysts said.

"Uncertainty is re-entering the economy and making money managers think," said Carlos Perez-Santalla at futures brokerage Marex Spectron.

For the week, gold was up almost 5 percent.

Gold's rally came as U.S. stock indexes were lower on Friday and on track for their biggest weekly declines in months.

Benchmark U.S. 10-year Treasury bond yields surged to a two-year high as investors bet that recent signs of economic growth will spur the Fed to begin paring back its bond purchase program next month.

Spot gold was up 0.9 percent at $1,377.60 an ounce, having set a two-month high of $1,379.60.

On Thursday, gold rallied more than 2 percent as a drop in the U.S. dollar triggered short-covering and a technical breakout once prices breached key resistance at $1,350 an ounce.

Gold completed a bullish reversal pattern after Thursday's breakout, and prices could now rise sharply higher toward the next major resistance in the $1,500 area, said Mark Arbeter, chief technical strategist at S&P Capital IQ.

U.S. gold futures for December settled up $10.10 at$1,371 an ounce, with trading volume about 10 percent below its 30-day average, preliminary Reuters data showed.

Silver last traded up 1.5 percent at $23.31 after earlier rising to a three-month high of $23.40 an ounce. The metal posted its strongest weekly rise since September 2008, with gains of around 13.5 percent.

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