PRECIOUS-Gold steadies with rate rises in focus; palladium at record high

    * Gold held near Wednesday's 3-1/2-month high
    * GRAPHIC - Palladium market balance vs price:
    * GRAPHIC - Palladium automotive demand vs price:

 (Updates prices, adds comment, NEW YORK dateline)
    By Renita D. Young and Maytaal Angel
    NEW YORK/LONDON, Jan 4, (Reuters) - Gold steadied around a
3-1/2-month high on Thursday as prospects for further U.S.
interest rate increases put the brakes on a recent rally, while
palladium touched record highs on tight supplies.
    Spot gold        rose 0.5 percent to $1,319.27 an ounce by
1:45 p.m. EST (1845 GMT), while U.S. gold futures         for
February delivery settled up $3.10, or 0.24 percent, at $1,321.6
per ounce. 
   Palladium        rose 1.2 percent to $1,095.24 an ounce,
earlier hitting a record high of $1,105.70.
    The U.S. dollar hit a four-month low against the euro amid
optimism about the euro zone economy. However, gold, which tends
to move counter to the U.S. currency, was unable to capitalize
on the dollar weakness and hovered just below its 3-1/2-month
high hit yesterday.
    "(Gold) is beginning to look overvalued. Our fair value for
gold assuming a (U.S.) rate hike in March and June is around
$1,230, so at current prices it looks expensive," said James
Butterfill, head of research at ETF Securities.
    Still, after digesting the U.S. Federal Reserve's minutes
from its December policy meeting released on Wednesday, market
participants have begun to doubt the sentiment that recent U.S.
tax changes will lead to inflation, and the widely-expected path
of future rate hikes, analysts said. 
    "They're starting to doubt that the Fed will hike rates as
much as they said they will. That provides a more attractive
environment for gold," said Daniel Ghali, commodities strategist
at TD Securities in Toronto.
    Gold is highly sensitive to rising U.S. interest rates
because they increase the opportunity cost of holding
non-yielding bullion while boosting the dollar, in which it is
    Gold also benefited from safe-haven purchases. 
    "That's why we think its likely to continue to trade between
$1,200 and $1,300 over the next six months," Butterfill said.
    Spot gold marked its highest since Sept. 15 at $1,321.33 on
Wednesday but eased as the dollar recovered after minutes from
the Fed's December policy meeting had initially bolstered
expectations for more increases to U.S. interest rates.
    Palladium's price jumped 56 percent last year on fears of a
shortage fueled by Chinese car sales growth, tightening
emissions controls and a swing away from diesel cars in Europe.
    "We see palladium prices remaining well supported, although
there is a danger from here of a short-term pullback as
investors take profits," Mitsubishi said in a note. 
    Silver        rose 0.3 percent at $17.18 per ounce after
earlier hitting a eight-week high at $17.26.
    Platinum        rose 0.7 percent to $963 an ounce after
earlier touching a 3-1/2 month high of $964.80.

 (Additional reporting by Nallur Sethuraman; Editing by David
Goodman and Tom Brown)