By Peter Hobson
LONDON (Reuters) - Gold prices on Friday held onto gains made after this week's interest rate rise by the U.S. Federal Reserve and were set for their first weekly rise in four weeks.
Spot gold was up 0.1 percent at $1,254.45 an ounce at 1618 GMT, recovering from a five-month low of $1,235.92 on Monday and up 0.5 percent this week.
U.S. gold futures were flat at $1,257.20 an ounce.
Higher interest rates usually push gold lower because they raise bond yields, reducing the appeal of non-yielding bullion, and boost the dollar, making gold more expensive for holders of other currencies.
But markets had priced in Wednesday's rise and the dollar and bond yields fell after the Fed kept its outlook of three rate rises next year unchanged and said proposed U.S. tax cuts would not significantly spur growth.
U.S. inflation remained weak, which Chicago Fed President Charles Evans said on Friday undermined the case for rate rises.
The dollar and bond yields recouped some losses on Friday as Republican senators worked to resolve disagreements on the tax reform, while sterling fell as investors booked some profits after recent gains.
Previous U.S. interest rate increases have also seen gold fall ahead of the decision and rise after it.
This coincides with a seasonal trend that is likely to last until at least April and could propel prices above $1,300, said Commerzbank analyst Carsten Fritsch.
"Since 2011, with only one exception, gold prices tended to recover after the Fed meeting in December and continued to rise well into the next year," he said.
Also helping was a rise in demand in Asia as buyers took advantage of low prices.
But Societe Generale analyst Robin Bhar said gold's bounce would be short-lived because other asset classes including equities, industrial metals and even bitcoin appeared to offer better returns.
Gold is up around 9 percent this year while global shares and industrial metals have gained some 20 percent and bitcoin 1,750 percent.
On the technical side, resistance was at Thursday's high of $1,258 and the 200-day moving average at $1,268, said MKS PAMP trader Tim Brown.
In other precious metals, silver was up 0.4 percent at $15.94 an ounce and set for its first weekly gain in four weeks, up around 0.6 percent.
Platinum was 0.8 percent higher at $885.20 an ounce but set for a fourth weekly fall, down 0.3 percent.
Palladium was down 0.8 percent at $1,024.97 but up 2 percent this week after hitting $1,038 an ounce on Thursday, the highest since early 2001.
(Additional reporting by Apeksha Nair in Bengaluru; Editing by David Evans and Edmund Blair)