Gold gains one percent on dollar retreat, short-covering

By Sethuraman N R and Swati Verma

(Reuters) - Gold rose 1 percent on Wednesday, helped by a slight retreat in the dollar following a rally and as some investors covered their short positions after the metal held the key $1,200 level.

Spot gold <XAU=> was up 1 percent at $1,214.14 per ounce at 13:43 p.m. EST (1843 GMT). This was the metal's biggest one-day gain in nearly two weeks. Prices had slipped to their lowest since Oct. 11 at $1,195.90 in the previous session. U.S. gold futures <GCcv1> settled up $8.70, or 0.72 percent, at $1,210.10

"The dollar has weakened a little bit and that has helped gold to catch a bid ... There has also been some short covering after gold held the $1,200 level well," said Walter Pehowich, executive vice president of investment services at Dillon Gage Metals.

"Also, the rebound in oil prices has given some support from the inflationary point of view."

An index that tracks the dollar versus a basket of six major currencies <.DXY> was down 0.2 percent after hitting a 16-month high on Monday.

"The key driver in the near term continues to be currency movements," said Suki Cooper, precious metals analyst at Standard Chartered Bank.

Factors including increased buying by central banks, the return of interest amongst exchange-traded fund (ETF) investors and seasonal demand for physical gold "are acting as a cushion to the downside," she added.

Holdings of the world's largest gold-backed ETF, SPDR Gold Trust <GLD>, remained near their highest level in more than two months. [GOL/ETF]

Bullion has fallen about 11 percent from a peak in April as investors instead flocked to the dollar, with U.S.-China trade friction unfolding against a background of higher U.S. interest rates.

The dollar has benefited over the past week from expectations for further U.S. interest rate hikes, as well as concerns over Italy's budget and ongoing Brexit talks.

The U.S. central bank is expected to increase rates in December for a fourth time this year. Rising U.S. interest rates increase the opportunity cost of holding non-yielding bullion.

Among other precious metals, silver <XAG=> rose 1 percent to $14.12 per ounce, after earlier hitting $13.85 - its lowest since Jan. 21, 2016.

"With so much silver around and lack of investment, nobody really cares about silver right now. There is so much above ground inventory that is causing silver prices to fall," Pehowich of Dillon Gage Metals said.

Palladium <XPD=> rose about 1.5 percent to $1,126.20 per ounce, while platinum <XPT=> was down 0.1 percent at $833.90 an ounce.

(Reporting by Swati Verma, Karthika Suresh Namboothiri and Arpan Varghese in Bengaluru; editing by G Crosse and Diane Craft)