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PRECIOUS-Gold scales 7-week peak as Trump's Mexico threat rattles markets

Eileen Soreng

* Trump vows tariffs on Mexico unless illegal immigration ends

* Spot gold up 1.5% so far this month

* Platinum heads for biggest monthly loss since 2015

* Silver on track for fourth straight monthly loss (Adds comments, details, updates prices)

May 31 (Reuters) - Gold climbed to a seven-week high on Friday and was headed for its first monthly gain in four as investors scurried into the safe-haven bullion following Washington's shock threat of tariffs on Mexico, which heightened fears of a global downturn.

Spot gold jumped 1.1% to $1,302.62 an ounce by 10:38 a.m. ET (1438) GMT, having hit its highest since April 11 at $1,304.24.

Bullion has risen by about 1.5% so far this month and is also on track for a second consecutive weekly gain, advancing by about 1.5%.

U.S. gold futures rose 1.1% to $1,301.60.

"People are doing fear trade now and running towards gold," said Michael Matousek, head trader at U.S. Global Investors, adding, investors were becoming very unsure of what U.S. President Donald Trump was planning to do.

"That tells you need to have higher allocation to gold in your portfolios."

Trump on Thursday said that Washington will impose a 5% tariff on all goods coming from Mexico, starting on June 10, until the flow of illegal immigrants into the United States ceases.

Meanwhile, Mexico's President Andres Manuel Lopez Obrador, said he would respond with "great prudence" to the threats and called on Mexicans to unite to deal with the challenge.

U.S. stocks opened sharply lower, hit by fears that Trump's threat of tariffs on Mexico could prove the trigger that pushes the world's largest economy into recession.

"The dollar index is still in the 98-area, which is normally a headwind for gold but because of the extreme stock tumbling, it seems to be ignoring the normal headwind," said George Gero, managing director at RBC Wealth Management.

"Gold is probably going to stay in this $1,300 area as long as the selloff (in equities) continues."

The dollar briefly trimmed its losses versus a basket of currencies on Friday as stronger-than-forecast data on U.S. consumer spending and income in April tempered some worries about a slowing U.S. economy.

Meanwhile, expectations of a cut in interest rates by the U.S. Federal Reserve increased after recent weak economic readings from the United States added to concerns raised by the prolonged U.S.-China trade dispute.

U.S. interest rate futures rose on Friday as traders increased their bets on more than one rate cut from the Fed.

Lower interest rates would support gold because they reduce the opportunity cost of holding non-yielding bullion.

Elsewhere, silver rose 0.7% higher to $14.61 an ounce but looked poised to register for a fourth consecutive monthly loss.

Platinum was up 0.5% at $795.53, but was on track for its biggest monthly loss since November 2015, down about 10%.

Palladium slipped 1.7% to $1,344.41 and was down about 3.4% for the month. (Reporting by Eileen Soreng and Diti Pujara in Bengaluru Editing by Marguerita Choy)