Array

LONDON, July 2 (Reuters) Security concerns and a sharp drop in the dollar helped gold hit a one-week high on Monday, but investors traded cautiously ahead of the U.S. Independence Day holiday.

Gold rose as high as $655.00 an ounce, the highest since June 22, and was quoted at $654.30/654.90 at 1350 GMT, against $648.70/$650.20 in New York late on Friday and last week's three-month low of $638.90.

''The terror attacks in the UK over the weekend could bring some safe-haven positioning into the gold market over the next few days, although with the Independence Day holiday in the U.S. on Wednesday, conditions are likely to be on the thin side,'' said James Moore, precious metals analyst at TheBullionDesk.com.

Security fears came to the fore again after Britain raised its security rating to its highest level of critical -- meaning an attack is believed to be imminent -- after failed car-bombing attempts in London and an attack on a Scottish airport.

Gold is often used as a hedge against global economic and geopolitical uncertainty and oil-led inflation, while a lower U.S. currency makes dollar-denominated metals cheaper for investors based outside the United States.

''Although physical demand will improve from September onwards, conditions will be slack in the coming weeks and gold is likely to find itself dictated to in some measure by currency movements,'' SG Corporate and Investment Banking said.

The dollar slumped to a seven-week low against the euro and fell against other major currencies as U.S. housing sector weakness reinforced views that U.S. interest rates would remain relatively steady while borrowing costs rise overseas.

Analysts said physical gold demand was likely to slow down in the northern hemisphere summer as the period is seasonally less active because of more spending on travel and the monsoon season in India, the world's largest consumer.

''We believe that $650 is a neutral territory for gold at the moment...But with physical demand light for seasonal reasons, one of the two pillars of our argument for higher gold prices is currently not present in the market,'' said John Reade, head of metals strategy at UBS Investment Bank.

''We continue to expect gold to trade higher in the balance of 2007 but without the support from strong price-elastic demand, we suspect gold will languish in the next month or so. We will only turn tactically bullish on gold if speculators amass decent-sized short positions,'' he said in a daily note.

Last week, speculators slashed their net long, or bullish bets, in U.S. gold to 9.03 million ounces, the lowest since October 2006.

Palladium was at $366/369, up from $362.50/366.50 an ounce in New York, while silver rose to $12.53/12.57 an ounce from $12.36/12.41. Platinum was at $1,275/1,279 an ounce, up $5 from its close in New York.

REUTERS SR GC1953