Gold logs 3% weekly gain, best since January

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Gold futures closed up modestly on Friday, logging their biggest weekly gain since mid-January as soft U.S. consumer sentiment data weighed on the dollar and further diminished expectations for a near-term rise in U.S. interest rates.

U.S. gold futures for June delivery closed up 10 cents at $1,225.30 an ounce, up 3 percent on the week. Spot gold was up 0.2 percent at $1,224 an ounce.

The dollar eased against the euro in the wake of the report, allowing gold to extend a three-day rally that took prices to their highest since mid-February on Thursday at $1,227.04.

Recent economic reports have supported market expectations that the economy is not strong enough for the Fed to start raising record-low rates from June.

Demand for gold continues to fall

Data released on Friday showed U.S. consumer sentiment fell more than expected this month, though an earlier report showed manufacturing activity growth in New York State accelerated in May after weakening for three consecutive months.

"If the data remains soft in the United States, this rally has potential," Commerzbank analyst Eugen Weinberg said. "When data is more on the soft side, the market will be looking for indications on when the Fed will be raising interest rates."

"Sentiment recently on gold has been very weak," he added. "Outstanding net length of speculators has been extremely low, so I wouldn't be surprised to see them adding to positions over the next days and weeks."

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Gold is sensitive to rate expectations, as higher rates increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.

"The last few days have been positive for the metal and, despite perhaps just falling short of a full technical breakout, the ground work has certainly been laid for further advance," MKS said in a note.

Investors remain cautious over the outlook for gold, which has fallen for the past two years and has struggled to maintain gains this year. Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, fell 0.61 percent on Thursday to a four-month low of 723.91 tons.

Physical buying slowed in Asia as higher prices kept some consumers away. In China, premiums eased about 50 cents to $1 an ounce over the global benchmark on Friday, from premiums of $2-$3 earlier in the week.