Gold prices hit a three-month high on Friday and were set for a second straight weekly gain, with demand bolstered by the Middle East conflict and expectations that the Federal Reserve's rate hikes are nearing an end.

Spot gold was up 0.2% at $1 977.60 per ounce at 07:20 GMT, after hitting its highest since July 20. US gold futures GCcv1 added 0.5% to $1 990.30.

"There is fear that it's (Israel-Hamas war) going to escalate into something of a broader regional crisis, potentially a protracted conflict... So we are seeing investors positioning in safe havens," said Kyle Rodda, financial market analyst at Capital.com.

Israeli Defence Minister Yoav Gallant told troops gathered at the Gaza border on Thursday that they would soon see the Palestinian enclave "from inside," implying that an expected ground invasion could be nearing.

Gold, often used as a safe store of value during times of political and financial uncertainty, has risen 2.4% this week.

"Gold prices were supported as fears of another Fed rate hike in 2023 subside," Fitch Solutions said in a note.

"We remain neutral towards gold prices for 2023, expecting prices to average $1 950/oz."

Fed Chair Jerome Powell in his remarks to the Economic Club of New York agreed "in principle" that the rise in bond yields was helping to further tighten financial conditions and "at the margin" might lessen the need for additional rate increases.

Higher interest rates raise the opportunity cost of holding gold.

Markets are widely expecting the Fed to keep interest rates on hold at its policy meeting next month, according to the CME FedWatch tool.

Spot gold is expected to extend gains into a range of $1 998 to $2 010 per ounce, as it has broken a resistance at $1 972, according to Reuters technical analyst Wang Tao. TECH/C

Spot silver fell 0.2% to $22.98 per ounce, but was headed for a second consecutive weekly rise. Platinum eased 0.1% to $890.27 and palladium lost 0.8% to $1 105.13.