PRECIOUS-Gold prices drop on profit-taking, firmer dollar

* Spot gold off 3-1/2 month highs hit Wednesday

* Gold on Wednesday posted first one-day loss in nearly 3 weeks

* Dollar firm on positive U.S. data, Fed minutes

(Adds comment, updates prices) Jan 4 (Reuters) - Gold prices fell on Thursday after hitting a 3-1/2-month high the session before, pulled down as investors took profits and as the U.S. dollar firmed.

Spot gold was down 0.3 percent at $1,308.82 an ounce at 0712 GMT. U.S. gold futures dropped 0.6 percent to

$1,310 an ounce. Spot gold marked its highest since Sept. 15 at $1,321.33 on Wednesday, but then dropped as the dollar recovered from over 3-month lows. It fell further after minutes from the Federal Reserve's December policy bolstered expectations for more U.S. interest rate hikes. Gold, which had rallied $85 from nearly 5-month lows hit in mid-December, posted its first day of losses in nearly three weeks on Wednesday. "People are looking to lock in some gains after a pretty strong rally over the past weeks," said ANZ analyst Daniel Hynes. "Geopolitical issues have certainly been a huge power point of the gold's rally into the year-end ... It is going to be a U.S. dollar type story going forward with markets taking a neutral view." The dollar was firm on Thursday in the wake of upbeat U.S.

data .

U.S. factory activity increased more than expected in December, boosted by a surge in new orders growth, in a further sign of strong economic momentum at the end of 2017.

Minutes from the Fed's Dec. 12-13 meeting were seen as more hawkish than anticipated, indicating the central bank is still poised to raise interest rates several times this year. The minutes suggested that the central bank would continue to pursue a gradual approach in raising rates but could pick up the pace if inflation accelerates. Gold is highly sensitive to rising U.S. interest rates as they increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced. "We still feel that gold has come a long way and may correct a little further from here," MKS PAMP trader Alex Thorndike said. "That being said we view a pullback towards $1,290-$1,295 as a decent buying opportunity."

Spot silver fell 0.6 percent to $17 an ounce, after

hitting a six-week high on Wednesday at $17.24.

Spot platinum was down over 1 percent at $943 an


Spot palladium rose 0.4 percent to $1,086.95. It

touched an all-time high on Tuesday at $1,096.50.

(Reporting by Nallur Sethuraman in Bengaluru; Editing by Richard Pullin and Joseph Radford)