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Gold rallies on cautious Fed, weak dollar

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Gold rose above $1,200 an ounce on Thursday, its biggest increase in almost a month, as the U.S. dollar slid the day after the Federal Reserve indicated that interest rates may rise more slowly than many had expected.

An early rally across precious metals sent silver to its highest in two weeks, although buying in platinum and palladium ran out of steam by late afternoon.

"This is all about the Fed and the lower rate hike projections," Saxo Bank analyst Ole Hansen said.

On Wednesday, Fed policymakers said an increase from the current near-zero interest rate would be appropriate only after further improvement in the labor market.

Precious metals prices have come under pressure this year from expectations that rates will soon rise for the first time in nearly a decade.

Precious metals have benefited strongly in recent years from record low U.S. rates, which have cut the opportunity cost of holding non-yielding assets while keeping the dollar in check.

Piercing above the $1,200 mark, spot gold was up 1.4 percent at $1,202.50 an ounce, while U.S. gold futures for August delivery settled up 2.1 percent at $1,202 an ounce, their highest in almost four weeks.

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The Fed statement was "a bit more dovish than the market had expected considering the improvement in economic data since the last meeting," said Hansen. "Two quarter-percentage-point hikes before the end of the year could easily become just one if Greek worries, a strong dollar and low inflation outlook continue."

Concerns about Greek's debt crisis and the weak dollar also boosted prices, precious metals strategist for RBC Capital Markets in New York.

Bullion came off its earlier highs after a German newspaper reported Greece's aid will be extended until year-end.

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Euro zone leaders will hold an emergency summit on Monday to try to avert a default after bank withdrawals accelerated and government revenue slumped as Athens and its international creditors remain deadlocked over a debt deal.

Silver was up 0.41 percent at $16.23 an ounce, platinum was down 0.05 percent at $1,088.50 an ounce and palladium was down 0.5 percent at $724.5 an ounce.

Gold extended its historically unusual premium over platinum to $114 an ounce, its highest in 2-1/2 years. Platinum hit its lowest in more than six years on Tuesday.