PRECIOUS-Gold edges up, but set for weekly drop as inflation fears offset safe-haven demand

By Pablo Sinha

March 6 (Reuters) - Gold edged up on Friday on safe-haven demand amid escalating tensions in the Middle East, but was headed for a weekly loss, as mounting inflation worries dimmed prospects for interest rate cuts.

Spot gold XAU= was up 0.3% at $5,093.76 per ounce, as of 0942 GMT. The metal is down over 3% so far this week, snapping a four-week winning streak, as fading interest rate-cut prospects and a volatile dollar weighed on bullion.

U.S. gold futures GCcv1 for April delivery were up 0.5% at $5,102.10.

"Geopolitical risk remains a key factor supporting prices as hopes of a swift resolution in Iran do not appear forthcoming right now. However, upside potential is being capped by inflationary fears due to rising oil prices, (which have) strengthened the 'higher-for-longer' narrative regarding US interest rates," said Zain Vawda, analyst at MarketPulse by OANDA.

While gold is considered a long-term hedge against inflation, it tends to do well when interest rates are low, as it is a non-yielding asset. It has risen over 18% so far this year.

Israel carried out heavy air strikes on Hezbollah-controlled southern suburbs of Beirut and started a "broad-scale" wave of attacks against infrastructure in Tehran on Friday, while Iran said it targeted the heart of Tel Aviv with missiles.

Crude prices headed for the sharpest weekly gain since Russia launched its full-scale invasion of Ukraine in February 2022. O/R

The dollar slid around 0.1%, making greenback-priced bullion more affordable for holders of other currencies, but was headed for its steepest weekly gain in more than a year.

Meanwhile, U.S. Federal Reserve policymakers will meet on March 18, where they are widely expected to hold interest rates steady, according to CME Group's FedWatch tool.

Investors are now looking out for February's U.S. employment report, due later today, with a Reuters survey of economists predicting that nonfarm payrolls increased by 59,000 jobs last month.

Demand for physical gold eased in India this week as volatile prices deterred buyers, while premiums in China held firm on a pickup in investment demand.

Spot silver XAG= rose 0.8% to $82.71 per ounce. Spot platinum XPT= ticked 0.1% higher to $2,123.08, while palladium XPD= gained 0.2% to $1,632.13. All metals were heading for weekly losses.