LONDON – Gold prices hit 7-1/2-month lows on Friday on speculation that the Federal Reserve may raise interest rates next year, and as the dollar index headed for its longest winning streak since 1997.

The precious metal is on track for its biggest weekly fall since late May, with a drop of 2.4%. Its weakness has dragged down other precious metals, with platinum hitting a 2014 low of $1 350.40/oz in earlier trade.

Spot gold hit a low of $1 231.95/oz, its weakest since January 23, and was down 0.2% at $1 238.45 at 11:33 GMT. US December gold futures were down 10c an ounce at $1 238.90, off a low of $1 232.80.

Gold is suffering from growing expectations that the Fed will raise interest rates in 2015, which would boost the dollar, in which the metal is priced, while raising the opportunity cost of holding non-yielding bullion.

"Nominal rates have moved higher, which may reflect accelerated growth and ... expectations of Fed tightening, but at the same time we've seen inflation expectations not going anywhere," Bank of America Merrill Lynch analyst Michael Widmer said.

"So you have on the one hand accelerating growth and higher nominal rates, but at the same time the market seems to believe that will not be strong enough to reflate the economy," he added. "That is the most bearish environment for gold. And the dollar doesn't help either."

The dollar index, which measures the U.S. unit's performance against a basket of major currencies, has risen for nine straight weeks as the Fed's quantitative easing (QE) programme, which has seen the central bank pump some $4-trillion into the economy, draws to its expected close in October.

Bearish momentum indicators for gold have accelerated, and a sustained break below $1 232 could take gold near $1 180, technical analysts at ScotiaMocatta said.

INVESTOR INTEREST SOFT

Expectations that QE was set to end helped trigger a 28% drop in gold prices last year. Investment interest has struggled to recover from the rout.

"For much of this year, investors and speculators struggled to have a clear gold call, either of a long or short persuasion, and the metal's direction has been determined more by technicals, positioning and momentum, amidst a much depleted investor pool," UBS said in a note on Friday.

"The market's focus is now intensifying on Fed policy action and the timing of Fed rate hikes, and this should mean that gold becomes a useful indicator to the investor and spec community once again," it added.

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said on Friday that its holdings had dropped 0.32 t to 788.40 t on Thursday.

Among the main consumers of physical bullion, dealers said a one-quarter drop in local gold prices over the past year had shaken the confidence of Indians in the precious metal as a store of value.

Silver, down 0.3% at $18.59/oz, fell to a 14-month low, heading for a loss for the eighth week out of nine. Platinum is down 0.5% at $1 358.20/oz.

With a near 7% drop, palladium was the worst-performing precious metal of the week. The decline marks the metal's biggest weekly loss since June 2013. The metal was down 0.3% at $826/oz.