Gold around three-month low as dollar, shares weigh

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LONDON (Sept 11): Gold fell near a three-month low on Thursday, as European shares edged up and the dollar traded around a 14-month high while tensions in Ukraine seemed to be easing.

Spot gold slipped 0.2 percent to $1,246.15 an ounce by 1001 GMT, after dropping to a three-month low of $1,243.56 in the previous session.

U.S. gold futures added $1.40 an ounce at $1,246.90.

The dollar rose to a six-year high against the yen and was on track for a ninth consecutive week of gains against a basket of currencies as expectations continue to grow that the Federal Reserve might raise interest rates in 2015.

Higher interest rates would hurt the attractiveness of non-interest-bearing assets such as gold.

"The stronger dollar, interest rate expectations ahead of next week's (Fed policy meeting) are giving us a lot of negative information on gold's outlook," Societe Generale analyst Robin Bhar said.

"We've got a clear expectation that inflation is going to be low in the United States, which is another nail in gold's coffin," he added. "I'm convinced we are going to test $1,240."

Gold is usually seen as a hedge against inflation. The five-year U.S. breakeven inflation rate, a market measure of consumer price expectations taken from the spread between the five-year nominal Treasury yield and its inflation-linked counterpart, fell to its lowest in more than a year this week at 1.8068.

Data overnight showed Chinese consumer prices cooled more than expected in August, providing more evidence of economic slowdown.

Demand for gold as insurance against risk was also curbed after Ukraine's president said on Wednesday that Russia had removed the bulk of its forces from his country, raising hopes for a peace drive now under way after five months of conflict in which more than 3,000 people have been killed.

The metal has risen around 4 percent since the beginning of the year, also helped by risk aversion during periods of high political tension in Ukraine and the Middle East.

The recent drop in gold prices attracted some bargain hunters with holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rising three tonnes on Wednesday to 788.72 tonnes - the first inflow in three weeks.

Dealers in Hong Kong, the main conduit for gold into China, said demand had picked up in recent days because of the drop in prices, but not in any robust way.

In India, the second-biggest buyer, demand is expected to pick up ahead of the Diwali festival, but import curbs could keep any gains in check.

"While gold may face further pressure in the current macro environment, a pick-up in physical demand would help stem the possibility for further losses," HSBC said in a note.

"Physical demand appears light despite gold's price decline so far in the month."

Other precious metals tracked gold lower. Silver was down 0.4 percent at $18.83 an ounce, having touched a three-month low.

Platinum fell to a seven-month trough of $1.372.70 an ounce, while palladium was down 0.3 percent at $843.80.