* India’s Diwali later this week boosts physical demand
* Dollar index drops after volatile week
* SPDR Gold ETF posts rare weekly inflow last week (Updates market activity)
By Frank Tang and Jan Harvey
NEW YORK/LONDON, Oct 20 (Reuters) - Gold rose on Monday, snapping two straight losing sessions, boosted by a fall in the dollar and renewed physical demand related to Diwali, India’s major bullion-buying event this week.
Earlier, gold rose to $1,248.44 an ounce, near a one-month high, as physical bullion demand picked up ahead of Diwali on Wednesday and the start of the Indian wedding season, when demand is traditionally the strongest.
Last week, the metal posted a second straight weekly gain, despite closing lower on Thursday and Friday as global economic worries triggered safe-haven bids. However, a subsequent recovery in equity markets and resilient growth in the U.S. economy could pressure gold prices in the near term, analysts said.
“(Physical) buying needs to pick up materially to overwhelm the gold-negative external drivers; in turn, we would continue to look for opportunities to short the rally,” said Suki Cooper, precious metals analyst at Barclays Capital.
Spot gold was up 0.6 percent at $1,245.55 an ounce by 3:14 p.m. EDT (1914 GMT).
U.S. COMEX gold futures for April delivery settled up $5.70 an ounce at $1,244.70 in lighter-than-usual turnover, preliminary Reuters data shows.
A 0.2 percent drop of the U.S. dollar against a basket of major currencies also underpinned gold. After a week of wide currency market gyrations, investors appear to have settled in for a quiet start to the week, unwilling to make new bets ahead of Wednesday’s U.S. inflation data and Thursday’s European manufacturing reports.
Demand from the leading centers of physical gold buying in Asia has been strong but may be set to abate, with premiums of the kilobar contract slipping into discount at the Shanghai Gold Exchange last week, MKS said in a note on Monday.
Sentiment in the broader financial markets showed some tentative signs of recovery, however.
U.S. Treasuries prices pared earlier gains Monday as the Standard & Poor’s 500 and Nasdaq equity indexes turned higher, reducing earlier safety bids for low-risk government debt.
The world’s largest bullion-backed exchange traded fund, SPDR Gold Trust, has also seen an uptick in investments. Its holdings rose 1.5 tonnes last week, its first weekly inflow since early September.
Among other precious metals, platinum was up 0.9 percent at $1,264.70 an ounce, while palladium rose 1.2 percent at $760.05 an ounce. Silver was up 0.7 percent at $17.35 an ounce. (Additional reporting by A. Ananthalakshmi in Singapore; Editing by Susan Thomas, David Evans, James Dalgleish and Andre Grenon)