PRECIOUS-Gold drops on profit taking, posts biggest weekly gain in 2 months

* Gold posts 3.3 percent gain for week * Rally loses steam as ETF holdings drop * Fed tapering seen key to gold's long-term direction * Coming up: US existing home sales Monday (Adds analyst comment, second byline, dateline, updates market activity) By Frank Tang and Jan Harvey NEW YORK/LONDON, Oct 18 (Reuters) - Gold fell on Friday as investors took profits after the previous session's 3 percent rally on expectations the partial U.S. government shutdown will lead the Federal Reserve to postpone tapering of its bond-buying stimulus. The precious metal was up more than 3 percent for the week, its biggest weekly gain in two months. Heavy short covering boosted gold prices after the Congress clinched an 11th-hour deal earlier this week to pull the world's biggest economy back from the brink of debt default. However, gold's upward momentum faded on Friday, partly after data showed holdings in the world's largest bullion exchange-traded fund, SPDR Gold Trust, fell. "It remains to be seen whether the investor community will now restart their buying of various ETF's given that the Fed's tapering intentions are now merely being postponed," said Edward Meir, metals analyst at brokerage INTL FCStone. Gold-backed ETF holdings are often seen as a gauge of investor interest. Spot gold fell 0.4 percent to $1,313.68 an ounce by 1:41 p.m. EDT (1741 GMT). U.S. Comex gold futures for December delivery settled down $8.40 an ounce at $1,314.60, with volume at just 100,000 lots, about 40 percent below its 30-day average, preliminary Reuters data showed. The metal leapt 3 percent on Thursday after the deal to re-open the U.S. government and a downgrade to the country's sovereign rating by a Chinese credit rating agency knocked the dollar, prompting a rush among over-extended shorts to cover. "Once the government re-opened and the agenda moved on from the debt crisis to next week's Federal Reserve meeting, that was a trigger for gold to see some upside," Mitsubishi analyst Jonathan Butler said. However, in the long run, gold is likely to sell off as soon as talks of Fed tapering resume, Butler said. Gold's 20 percent drop this year has largely been after Fed Chairman Ben Bernanke signalled earlier this year the central bank's $85 billion monthly bond-buying scheme - which had driven gold higher by keeping a lid on interest rates while stoking inflation fears - will be tapered. ETF HOLDINGS DROP Investment interest in gold remained lackluster, as the SPDR Gold Trust reported another 3.3-tonne drop in its holdings on Thursday. The fund posted a fourth straight week of outflows. Its holdings have fallen more than 35 percent from their December 2012 peak, and are down nearly 3 percent this month. Among other precious metals, silver edged up 0.1 percent to $21.87 an ounce. Platinum was up 0.1 percent at $1,431.10 an ounce and palladium slipped 0.1 percent to $737.72 an ounce. 1:41 PM EDT LAST/ NET PCT LOW HIGH CURRENT SETTLE CHNG CHNG VOL US Gold DEC 1314.60 -8.40 -0.6 1311.20 1328.90 92,468 US Silver DEC 21.913 -0.034 -0.2 21.740 22.050 21,878 US Plat JAN 1437.80 2.90 0.2 1429.00 1446.60 8,404 US Pall DEC 740.65 2.85 0.4 733.00 742.55 4,447 Gold 1313.68 -5.41 -0.4 1312.23 1325.21 Silver 21.870 0.030 0.1 21.760 22.010 Platinum 1431.10 1.20 0.1 1432.25 1440.74 Palladium 737.72 -0.78 -0.1 736.77 740.00 TOTAL MARKET VOLUME 30-D ATM VOLATILITY CURRENT 30D AVG 250D AVG CURRENT CHG US Gold 98,649 161,919 190,244 21.08 -0.49 US Silver 22,481 44,446 56,457 32.11 -1.78 US Platinum 8,462 14,365 13,017 22.19 0.00 US Palladium 4,497 3,832 5,774 (Additional reporting by A. Ananthalakshmi in Singapore; Editing by William Hardy, Pravin Char and Andrew Hay)

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