LONDON, June 29: Gold drifted higher Friday on a weaker dollar and firmer oil and dealers said physical buying might help the metal move further away from three-month lows.

Spot gold was quoted at $649.25/649.85 an ounce versus $647.90/$649.40 in New York late on Wednesday, when it fell as low as $638.90.

The dollar is slightly off this morning and that's helping gold prices to some extent, said Michael Widmer, director of metals research at Calyon Corporate and Investment Bank.

Prices below $650 will definitely attract physical buyers and underpin the market, but I see a rangebound trade in the coming weeks.

Analysts said investor confidence -- battered in recent days by the trouble in credit markets -- seemed to be on a firmer footing and the gold market was turning its attention back to traditional drivers such as oil and the dollar.

The precious metals markets bounced on a combination of easing in credit market concerns, which encouraged bullion buying and a rally in oil and other commodities, HSBC Bank said in a daily research note.

The dollar struggled to gain ground against other major currencies as traders took the view that recent data showing an easing of inflation and signs of weakness in growth and housing market indicators will discourage the US Federal Reserve from raising rates.

The Fed left key interest rates on hold at 5.25 per cent on Thursday as expected, making it a year since rates have been stuck at that level.

A weaker US currency makes dollar-denominated metals cheaper for investors in other currencies. Gold is often seen as a hedge against oil-led inflation.

Oil held around $70 a barrel as the market focused on falling inventories in the United States and a decline in crude stocks in a key delivery point in the world's top consumer.

For the moment it seems gold has returned to its normal values of being a safe-haven and hedge against inflation. For the moment sub-$650 should be viewed as a good buying opportunity by physical players as well as investors, said James Moore.

In other metals, silver rose to $12.48/12.54 an ounce from $12.41/12.46 in New York, while palladium fetched $365/369 an ounce, compared with $363/367.

Platinum was flat at $1,272/1,276, but remained underpinned by wage negotiations in South Africa, the world's largest producer of the metal.---Reuters