Gold closes higher on late short covering

By Jan Harvey and Carole Vaporean

LONDON/NEW YORK (Reuters) - Gold edged higher by the end of trade on Friday, as buyers covered short positions before the weekend and pulled prices up from lower levels that dominated much of the session, traders said.

The firmer dollar against the euro and lower crude oil prices limited gold's gains, they added.

Investors awaited the outcome of this weekend's meeting of G8 finance ministers.

Any further comment on inflation at the meeting may fuel expectations for a U.S. rate hike, which could strengthen the dollar, pressuring gold.

The precious metals tend to move in opposite direction to the dollar, as it is often bought as a hedge against weakness in the U.S. currency.

Gold had risen to $870.20/872.20 an ounce by 4:25 p.m. EDT, from $867.55/869.55 late in New York on Thursday.

New York August gold on the COMEX division of New York Mercantile Exchange rose in late business to finish up $1.10 at $873.10 an ounce, after hitting a low at $861.50.

"You had a bit of a short-covering rally in the latter part of the day. There was a lot of volatility. Today, it was just some technical squaring for positions over the weekend after a significant down week," said Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC.

The dollar put in for its strongest week in three years on the back of rising speculation of a U.S. interest rate hike, shedding just over 4 percent since Monday.

"With the stronger U.S. dollar environment, gold has been under a lot of pressure," said Dan Smith, an analyst at Standard Chartered.

A dip in crude prices is also helping dampen interest in the precious metals. Gold typically moves in line with crude as it is bought as a hedge against oil-led inflation.

INFLATION HEDGE

Nonetheless, with the dollar remaining broadly weak, the outlook for interest rates uncertain, and inflation on the rise, analysts remain broadly positive towards the outlook for gold.

While in the short term, an uptick in inflation may pressure gold as it raises expectations rates will rise, in the longer run gold's value as an inflation hedge is likely to encourage fresh buying of the precious metal.

Smith at Standard Chartered points to a rise in holdings by exchange traded funds (ETFs) - vehicles which trade securities backed by physical metal - as evidence that fund demand is strong.