PRECIOUS-Gold rises on soft dollar but U.S. bond yields cap gains

(Updates prices)

* Benchmark 10-year Treasury yields hit five-month peak

* Upside in gold capped by tapering expectations - analyst

Oct 20 (Reuters) - Gold prices extended gains for the second straight day on Wednesday, buoyed by a softer dollar, although gains were capped by elevated Treasury yields and the potential reduction in Federal Reserve’s asset purchases.

Spot gold rose 0.6% to $1,780.20 per ounce by 1105 GMT. The metal rose as much as 1.2% on Tuesday. U.S. gold futures gained 0.5% to $1,780.00.

“Gold remains supported because there’s inflationary pressure due to higher energy prices and weaker data coming out of China and U.S. factory output,” said Xiao Fu, head of commodities markets strategy at Bank of China International.

On the downside, there is safe-haven demand from global growth concerns, “but upside still capped by potential rise in Treasury yields and tapering expectations.”

Production at U.S. factories fell by the most in seven months in September, another indication that supply constraints were hampering economic growth.

Making gold more appealing for overseas buyers, the dollar index was little changed and not far from its three-week low hit on Tuesday.

Meanwhile, U.S. benchmark 10-year Treasury yields jumped to their highest since May 20.

Fed Governor Christopher Waller said on Tuesday if inflation keeps rising at its current pace in the next few months, Fed policymakers may need to adopt “a more aggressive policy response” next year.

Bullion is often considered an inflation hedge, though reduced stimulus and interest rate hikes push government bond yields up, raising the opportunity cost of holding non-yielding bullion

“For the last few weeks U.S. treasury yields have pushed higher as inflation concerns increase, yet gold has struggled to make any significant move one way or the other .... Gold is trading in a range between $1,720 and $1,820,” said Michael Hewson, chief market analyst at CMC Markets U.K.

Elsewhere, spot platinum fell 0.1% to $1,039.49 per ounce, palladium shed 1% to $2,076.68.

Silver rose 1.2% to $23.94.

Reporting by Arundhati Sarkar in Bengaluru Editing by Mark Potter and Louise Heavens