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* World share index hits record high, Japan stocks at 5-month top
* Gold near two-month peak after vicious short-covering rally
* U.S. bond yields up as Fed seen comfortable with rising inflation
By Patrick Graham
LONDON, June 20 (Reuters) - Global stocks traded just off record highs on Friday, still largely undeterred by a second week of violence in Iraq that has sent oil prices to nine-month highs.
Buoyed by the billions of dollars the U.S. Federal Reserve is still pumping into the global economy under its quantitative easing programme, equity markets took heart from a sanguine message this week on inflation from Fed chief Janet Yellen.
That effect was still dominant on Friday, with all of Europe's major exchanges inching up in early trade, although the headline MSCI index of world shares dipped 0.2 percent from record highs hit on Thursday.
"The goldilocks scenario of low rates and a slowly improving economy continues, with markets unmoved by continued geopolitical concerns," said Michael Hewson, chief market analyst at CMC Markets in London.
"Against that backdrop stocks look likely to remain underpinned, though trading today is likely to be cautious as we head into the weekend, given what could unfold ... in Iraq."
Iraqi government forces battled Sunni militants on Thursday for control of the biggest oil refinery in the country, OPEC's second-largest producer. If the 300,000 barrels per day refinery stays closed, Baghdad will need to import more oil products to meet domestic consumption, further tightening oil markets.
Oil prices rose further in response and they were within touching distance of nine-month highs on Friday at $114.96.
The other big beneficiary of events in Iraq has been gold, which sold off heavily earlier this year but is now close to two-month highs. It saw its biggest one-day rise in nine months on Thursday on the back of expectations, encouraged by the tone of Yellen's comments, that monetary policy will stay loose in the United States, Europe and Japan for a long time yet.
If the Fed and other central banks prove more willing in future to tolerate higher inflation in aid of faster economic growth then gold is a good way of hedging any impact on the value of the dollar and other currencies.
"Gold's move this week has been fuelled by a rebasing of expectations after the FOMC meeting, geopolitical risks, positioning and more favourable technicals," said Edel Tully, a strategist at UBS.
"We're not convinced that the rally has further longevity ... the move has a lot more to do with positioning, not just with shorts being elevated, but gross longs are also quite light."
Spot gold traded $1,309.30 an ounce having been as far as $1,321.70 at one stage on Thursday.
Japan's Nikkei ended steady after touching a fresh five-month peak, while the broader TOPIX brought its gains to more than 10 percent in just the past four weeks.
"The good mood is still lingering," said Kyoya Okazawa, head of global equities at BNP Paribas. "Not just foreign investors but also long-term domestic investors like pension funds have been buying as well."
MSCI's broadest index of Asia-Pacific shares outside Japan ran out of steam, easing 0.4 percent on losses in South Korea and China.
On currency markets, the main fallout of Wednesday's Fed meeting has been disappointment for the dollar. Some investors had been hoping for an aggressive message on the prospect of higher interest rates that would support the U.S. currency.
In contrast, expectations the Bank of England will move at latest by early next year drove the yield gap between two-year British gilts and U.S. Treasuries higher and helped the pound trade near 5-1/2 year highs.
The Norwegian crown, subject to a wipeout on Thursday after a U-turn by the central bank there on policy, was down another 0.4 percent on Friday. (Additional reporting by Francesco Canepa, Anirban Nag and Clara Denina; Editing by Catherine Evans)