Gold gains on weak dollar; but off 2-week high on robust US data

Gold prices edged up on Tuesday as a weaker dollar countered some pressure from the better-than-expected US manufacturing data, which pulled the metal down from a two-week high.

Spot gold was up 0.4% to $1,977.10 per ounce by 11 a.m. EDT (1500 GMT), having earlier hit its highest since Aug. 19 at $1,991.91.

US gold futures eased 0.1% to $1,976.10.

"The main reason (for gold's rise) right now is the weaker dollar. But, a better-than-expected ISM number took some shine off gold this morning," Bob Haberkorn, senior market strategist at RJO Futures said.

The US dollar was holding close to a more than two-year low, making gold cheaper for holders of other currencies.

US manufacturing activity accelerated to a more than 1-1/2-year high in August, the Institute for Supply Management (ISM) data showed.

"(The better data) doesn't necessarily change the picture for the US Federal Reserve. The trend (in gold) is still higher," Haberkorn added.

The US central bank last week announced an average inflation target policy, which will allow rates to stay low even if inflation rises a bit in the future.

Gold should be supported in this environment of firming inflation expectations, which is driving down real rates, and a weakening US dollar, said Daniel Ghali, commodity strategist at TD Securities.

Bullion is seen as a hedge against inflation and currency debasement, while lower interest rates reduce the opportunity cost of holding non-yielding bullion.

Elsewhere, silver was up 0.9% to $28.48 per ounce, after hitting its highest since Aug. 11.

Platinum rose 1.9% to $947.30 and palladium climbed 2.4% to $2,296.06.