* Palladium hits highest since February 2001
* Gold slips 1 pct as drop in sterling lifts dollar
* GRAPHIC-2017 asset returns: tmsnrt.rs/2jvdmXl
(Adds comments, updates milestones, prices, adds NEW YORK
By Devika Krishna Kumar and Jan Harvey
NEW YORK/LONDON, June 9 Gold prices fell about 1
percent on Friday as the dollar strengthened while palladium
leapt more than 7 percent as a surge in speculative demand
forced industrial users to close out short positions, traders
Palladium hit the highest level in 16 years as the
short-covering rally pushed the metal through long-term chart
The backwardation in the market - a formation in the forward
curve in which the price of metal for future delivery is below
the spot price - can suggest a near-term shortage of metal. It
recently steepened, prompting a wave of buying.
That pushed prices through the 16-year declining trendline
at $868 an ounce, triggering a further surge that took them to
their highest since early 2001 at $914.70 an ounce. Spot
palladium was at $889.50 an ounce by 3:02 p.m. EDT (1902
GMT), up 4.3 percent.
"The background for palladium is for good industrial demand
and likely a significant market deficit this year, and on top of
course you've got this speculative squeeze," Mitsubishi analyst
Jonathan Butler said.
"The backwardation has got a lot steeper in the last day.
Metal for immediate delivery is very tight, and that is being
reflected in those forward rates moving into an even steeper
Traders reported a reluctance to lend the metal, suggesting
tightness in near-term supply. However, chart patterns indicate
that the metal is vulnerable to a sell-off from these elevated
levels, technical analysts said.
Gold fell for a third day, meanwhile, after British
elections failed to deliver a clear majority for Prime Minister
Theresa May, knocking the pound sharply lower and helping lift
the dollar index to its highest since late May.
Spot gold was down 0.7 percent at $1,270.17 an ounce,
while U.S. gold futures for August delivery settled at
$1,271.40. Prices were down nearly 1 percent for the week, the
first weekly percentage decline in five weeks.
"In my mind, two things have been buoying the gold market
this year - one has been the weaker dollar and other is the need
for lots of monetary accommodation in Europe and Japan in
particular, especially given political risk," said Rob Haworth,
senior investment strategist at U.S. Bank Wealth Management.
"That risk has eased, even with the hung parliament out of
the UK election, it's not enough to derail Europe ... the
underpinnings of the gold market are being whacked away and
unless there is more geopolitical risk premium or global
economic risk, I think it was about time for the selloff in
Sterling-denominated gold rose to a near
two-month high of 1,007.98 pounds an ounce as the British
currency fell as much as 2.5 percent. Along with a drop in the
euro, that helped lift the dollar half a percent versus a
Meanwhile the FTSE share index, composed largely of
companies that earn foreign currencies and benefit from a weaker
pound, rose 1 percent, undermining potential demand for gold as
a haven from risk.
Among other precious metals, silver was down 1
percent at $17.21 an ounce, while platinum was 0.8
percent higher at $939.25.
(Reporting by Devika Krishna Kumar and Jan Harvey, additional
reporting by Vijaykumar Vedala and Koustav Samanta in Bengaluru;
editing by Elaine Hardcastle and Chizu Nomiyama)