Gold touched its highest in nearly two weeks on Tuesday, supported by a softer dollar and geopolitical tensions in Spain and North Korea, though gains were capped by expectations of another U.S. interest rate increase.

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Investors were particularly wary on Tuesday as Pyongyang celebrated the founding of its ruling party, a day after Russia and China both called for restraint on North Korea following a Twitter post from U.S. President Donald Trump hinting that military action was on his mind.

In Spain, the leader of Catalonia`s government called for a reduction in tensions in its standoff with Madrid over a bid in the wealthy northeastern region for independence.

The dollar index fell, Wall Street stock indexes scaled new records and U.S. Treasury yields dropped. [MKTS/GLOB]

"The Fed is going to raise rates, so we see gold breaking out of the (current) range down to the $1,250 level, with geopolitical tensions supporting the downside," said Societe Generale analyst Robin Bhar.

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"The only news holding down the price of course are the impending rate hikes from the Federal Reserve but if these political issues grow much worse you can bet that $1,300 will not be the top," said Miguel Perez-Santalla, vice president of Heraeus Metal Management in New York, referring to concerns about Spain and North Korea.

Fed funds futures showed traders were pricing in a nearly 90 percent chance of a December rate increase.

Gold is highly sensitive to rising interest rates, which increase the opportunity cost of holding non-yielding bullion. Higher rates also tend to boost the U.S. currency, making dollar-priced gold costlier for non-U.S. investors.

In other precious metals, silver rose 1.3 percent to $17.16 an ounce, after rising to the highest since Sept. 20 at $17.248.

"The gold-silver ratio is trading above the 10-year average, suggesting silver is undervalued," Standard Chartered said in a note.

"Silver`s supply and demand dynamics are supportive of higher prices in light of stagnating mine output and firming industrial demand. India`s silver imports are up almost 60 percent for the year to August while China`s are up 45 percent."

Platinum was up 2.3 percent at $932.60 an ounce, having hit its highest in two weeks at $933.90, while palladium rose 0.3 percent to $932.60.

(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)