* Spot gold off 3-1/2 month highs hit Wednesday
* GRAPHIC - Palladium market balance vs price: http://reut.rs/2CbLOvG
* GRAPHIC - Palladium automotive demand vs price: http://reut.rs/2CFs4BF
(Adds comment, updates prices) LONDON, Jan 4, (Reuters) - Gold steadied on Thursday after hitting a 3-1/2 month high in the previous session as profit-taking set in amid worries over looming U.S. rate hikes, while palladium touched its highest ever levels on tight supplies and bets on growing demand. The dollar hit a 3-1/2 month low versus the euro amid optimism about the euro zone economy but gold, which tends to move counter to the greenback, was unable to capitalize on the dollar weakness given its recent gains. "(Gold) is beginning to look over-valued. Our fair value for gold assuming a (U.S.) rate hike in March and June is around $1,230 so at current prices it looks expensive," said James Butterfill, head of research at ETF Securities. He added, however: "Gold is being used very much as an insurance policy against geopolitics and uncertain monetary policy, that's why we think its likely to continue to range trade between $1,200-1,300 over the next six months."
Spot gold edged up 0.1 percent at $1,313.68 an ounce at 1107 GMT, while U.S. gold futures dropped 0.3 percent
to $1,314.80 an ounce. Spot gold marked its highest since Sept. 15 at $1,321.33 on Wednesday, but then dropped as the dollar recovered after minutes from the Federal Reserve's December policy meeting bolstered expectations for more U.S. interest rate hikes.
The U.S. currency was also given a boost on Wednesday by strong manufacturing and construction data. 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. "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 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."
Palladium rose 1.3 percent to $1,097.10, having
touched an all-time high of $1,099.50, surpassing the record high set on Tuesday. Palladium jumped 57 percent last year as Chinese car sales growth, tightening emissions controls and a swing away from diesel cars in Europe fueled fears of a metal shortage.
"We see no reason that the fundamental tightness in the (palladium) market will change any time soon. We see palladium prices remaining well supported, although there is a danger from here of a short-term pullback as investors take profits," said Mitsubishi in a note.
Silver fell 0.1 percent to $17.11, after hitting a
six-week high on Wednesday at $17.24.
Platinum was down over 0.5 percent at $952.10.
(Additional reporting by Nallur Sethuraman; Editing by Adrian Croft)