(Updates prices)
By A. Ananthalakshmi
SINGAPORE, Jan 6 (Reuters) - Gold rallied for a third session in a row on Wednesday, paring earlier losses as investors sought safety in the metal amid escalating tensions in the Korean peninsula and the Middle East, and worries over the Chinese economy.
Traders, however, said gold's safe-haven rally was not as strong as they had expected given the geopolitical uncertainties and a softer dollar.
Spot gold XAU= rose 0.3 percent to $1,080.60 an ounce by 0700 GMT, after earlier slipping 0.3 percent. Gold has gained 1.6 percent in the last two sessions, after touching a four-week high of $1,083.30 on Monday.
"It is supposed to be a risk-off trade but gold is actually struggling at the moment," said a precious metals trader in Hong Kong. "It should have reacted more aggressively."
Gold prices could retreat as the metal has failed to hold above Monday's $1,083-level, he added.
Bullion is often seen as an alternative investment during times of geopolitical and financial uncertainty, although safe-haven rallies tend to be short-lived.
North Korea said it successfully tested a miniaturised hydrogen nuclear device on Wednesday, claiming a significant advance in the isolated state's strike capability and setting off alarm bells in Japan and South Korea.
Relations between Saudi Arabia and Iran collapsed over the weekend after the Kingdom's execution of a Shi'ite cleric, a prominent critic of Saudi policy, set off a storm of protests in Tehran.
The yen, also seen as a safe-haven, vaulted to a near three-month high against the dollar and multi-month highs versus other currencies on Wednesday.
Asian stocks fell on Wednesday as Beijing continued guiding the yuan lower and a survey pointed to weakness in China's services sector.
"The metal wants to go higher but has run into a couple of technical resistance levels," said ScotiaMocatta analysts, adding that the next support levels were at $1,070 and $1,063.
Gold's gains were also limited by a slide in oil prices to 11-year lows on Tuesday. The yellow metal is seen as a hedge against oil-led inflation.
A further decline in equity markets and a weakening of the dollar could prompt investors to channel money towards gold.
Bullion slid 10 percent last year on fears higher U.S. rates would lower demand for the non-interest-paying asset.
The Federal Reserve raised U.S. rates for the first time in nearly a decade last month. It is expected to hike rates further this year.
The U.S. central bank will release the minutes of its December policy meeting later on Wednesday. Traders will examine the minutes for clues about the Fed's rate hike path.
PRICES AT 0700 GMT
Metal
Last
Change Pct chg
Spot gold
1080.6
3.34
0.31 Spot silver
13.95
-0.01
-0.07 Spot platinum
884
-4.4
-0.5 Spot palladium
527
-7.31
-1.37 Comex gold
1079.8
1.4
0.13 Comex silver
13.945 -0.026
-0.19
COMEX gold and silver contracts show the most active months