* Gold climbs for fifth straight session
* U.S. monthly inflation data stronger than expected
* China gold premiums dip on higher prices (Adds comment, byline, NEW YORK dateline; updates prices)
By Marcy Nicholson and Jan Harvey
NEW YORK/LONDON, Oct 15 (Reuters) - Gold pared gains after reaching a 3-1/2-month high on Thursday as a stronger-than-expected reading of U.S. inflation drove the dollar index higher.
The data, which showed a steady pickup in underlying price pressures, revived speculation that the Federal Reserve may end its ultra-low interest rate policy later this year.
Spot gold was up 0.1 percent at $1,185.73 an ounce at 2:56 p.m. EDT (1856 GMT), after climbing to $1,190.63, the highest since June 22 and the fifth straight day higher.
U.S. gold futures for December delivery settled up $7.70 an ounce, or 0.7 percent, at $1,187.50, extending gains after closing above the 200-day moving average on Wednesday for the first time in five months.
“Gold showed impressive mettle recovering to close higher after falling nearly $20 from intraday highs as weekly jobless claims matched the lowest print in ten years,” said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York.
“Market participants remain a bit cagey as bullion has disappointed multiple times this year but the outlook remains solidly positive with the Fed on indefinite hold.”
U.S. jobless claims fell more than expected, potentially keeping the door open to an interest rate increase this year.
Gold benefits from low interest rates that cut the opportunity cost of holding non-yielding assets.
“Over the last couple of days the gold market has been pricing out the Fed (raising rates) ... because of data weakness. Today’s data wasn’t as weak as expected, so there’s a feeling that it maybe ran too fast,” ABN Amro analyst Georgette Boele said.
The world’s largest gold-backed exchange-traded fund, New York-listed SPDR Gold Shares, said its holdings rose 7.7 tonnes on Wednesday, the biggest gain since Feb. 2.
“Once gold gets above $1,170 an ounce and the 200-day moving average, it puts it on the radar for institutional investors,” Sharps Pixley Chief Executive Ross Norman said.
Physical buying of gold, however, softened due to the rise in prices with premiums on the Shanghai Gold Exchange down to about 50 cents an ounce from $2-$3 in the previous session.
A Reuters poll showed gold prices are still expected to post another year of losses in 2016, while platinum price outlooks were lowered.
Silver was flat at $16.12 an ounce, after touching its highest since late June at $16.19 an ounce.
Platinum was up 0.5 percent at $1,000.50 an ounce and palladium was up 0.6 percent at $701.75 an ounce. (Additional reporting by A. Ananthalakshmi in Singapore, Editing by David Evans and Meredith Mazzilli)