LONDON, Aug 22:Gold steadied on Tuesday after gaining overnight, while palladium hit its highest in more than two months on good demand from jewellery makers, dealers said.

Palladium rose as high as $343.50 an ounce — the highestsince June 7, before easing to $343/348, compared with $342/348 in the US market late on Monday.

Gold prices might gain but were expected to hover in a broad range in the summer holiday season, with choppy conditions continuing because of thin trading volumes, they said.

The market is positioning itself for a rise if this tension does increase and if the dollar weakens, said Stephen Briggs, economist at SG Corporate and Investment Banking, referring to the geopolitical situation in the Middle East.

The fund long position has been cut back in the last week or so. There is more scope for buying. Spot gold hit a high of $628.50 an ounce and was at $625.50/626.30, against $625.60/626.40 in New York the previous day, when it gained more than 2pc due to a weaker dollar and a surge in oil prices.

Oil prices steadied at over $72 a barrel after a two-day rally, as Iran vowed to press ahead with its nuclear programme, raising the prospect of sanctions against the world's fourth-largest oil exporter.

The dollar traded near a two-month low against the euro on Tuesday. A weaker dollar makes gold cheaper for holders of other currencies and generally lifts bullion demand.

We see scope for further dollar weakness in the months ahead, which in turn should benefit gold, Barclays Capital said in a report.

In related news, the Bundesbank reserved the right to reallocate some of its gold reserves into foreign currencies but did not plan to sell any to help overhaul Germany's public finances, Bundesbank President Axel Weber was quoted as saying.

Palladium was expected to gain further in the near term because of improved demand for the metal, used in jewellery and in automotive catalytic converters to clean exhaust fumes.

Prices spiked to a four-year high of $406 in May. I think the price is still very attractive, said a dealer in Hong Kong. The only problem with palladium is the colour may turn darker but perhaps a new technique could improve the jewellery making. Some dealers in Hong Kong said there was a pick-up in demand for palladium and platinum in China.

Spot platinum rose to $1,032/1,037 an ounce from $1,230/1,235 in the US market, while silver inched down to $12.24/12.34 an ounce from $12.29/12.39.—Reuters