* Gold hit 3-1/2 month high on Wednesday
* GRAPHIC - Palladium market balance vs price: http://reut.rs/2CbLOvG
* GRAPHIC - Palladium automotive demand vs price: http://reut.rs/2CFs4BF
(Updates prices) LONDON, Jan 4, (Reuters) - Gold steadied around a 3-1/2 month high on Thursday as prospects for further U.S. interest rate increases put a brake on a recent rally, while palladium touched record highs on tight supplies. The dollar hit a four-month low against the euro amid optimism about the euro zone economy. Gold, which tends to move counter to the U.S. currency, was unable to capitalise on the dollar weakness. "(Gold) is beginning to look overvalued. 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, that gold is being used as an insurance policy against geopolitics and uncertain monetary policy. "That's why we think its likely to continue to trade between $1,200 and $1,300 over the next six months," he said.
Spot gold edged up 0.2 percent to $1,314.92 an ounce
to $1,315.80. Spot gold marked its highest since Sept. 15 at $1,321.33 on Wednesday but eased as the dollar recovered after minutes from the Federal Reserve's December policy meeting bolstered expectations for more increases to U.S. interest rates.
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 because 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 past weeks," said ANZ analyst Daniel Hynes.
Palladium rose 1.8 percent to $1,101.80, having
touched a record high of $1,103.50. The metal's price jumped 56 percent last year on fears of a shortage fuelled by Chinese car sales growth, tightening emissions controls and a swing away from diesel cars in Europe.
"We see no reason that the fundamental tightness in the (palladium) market will change any time soon," Mitsubishi said in a note. "We see palladium prices remaining well supported, although there is a danger from here of a short-term pullback as investors take profits."
Silver rose 0.3 percent to $17.17 after hitting a
six-week high on Wednesday at $17.24.
Platinum rose 0.3 percent to $959.60.
(Additional reporting by Nallur Sethuraman; Editing by Adrian Croft and David Goodman)