Gold prices fell about 1 percent on Friday as the dollar strengthened while palladium leapt more than 7 percent as a surge in speculative demand forced industrial users to close out short positions, traders said.
Palladium hit the highest level in 16 years as the short-covering rally pushed the metal through long-term chart resistance.
The backwardation in the market - a formation in the forward curve in which the price of metal for future delivery is below the spot price - can suggest a near-term shortage of metal.
It recently steepened, prompting a wave of buying. That pushed prices through the 16-year declining trendline at $868 an ounce, triggering a further surge that took them to their highest since early 2001 at $914.70 an ounce.
Spot palladium was at $889.50 an ounce by 3:02 p.m. EDT (1902 GMT), up 4.3 percent.
"The background for palladium is for good industrial demand and likely a significant market deficit this year, and on top of course you've got this speculative squeeze," Mitsubishi analyst Jonathan Butler said.
"The backwardation has got a lot steeper in the last day. Metal for immediate delivery is very tight, and that is being reflected in those forward rates moving into an even steeper backwardation."
Traders reported a reluctance to lend the metal, suggesting tightness in near-term supply.
However, chart patterns indicate that the metal is vulnerable to a sell-off from these elevated levels, technical analysts said. Gold fell for a third day, meanwhile, after British elections failed to deliver a clear majority for Prime Minister Theresa May, knocking the pound sharply lower and helping lift the dollar index to its highest since late May.
Spot gold was down 0.7 percent at $1,270.17 an ounce, while U.S. gold futures for August delivery settled at $1,271.40. Prices were down nearly 1 percent for the week, the first weekly percentage decline in five weeks.
"In my mind, two things have been buoying the gold market this year - one has been the weaker dollar and other is the need for lots of monetary accommodation in Europe and Japan in particular, especially given political risk," said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.
"That risk has eased, even with the hung parliament out of the UK election, it's not enough to derail Europe ... the underpinnings of the gold market are being whacked away and unless there is more geopolitical risk premium or global economic risk, I think it was about time for the selloff in gold."
Sterling-denominated gold rose to a near two-month high of 1,007.98 pounds an ounce as the British currency fell as much as 2.5 percent. Along with a drop in the euro, that helped lift the dollar half a percent versus a currency basket.
Meanwhile the FTSE share index, composed largely of companies that earn foreign currencies and benefit from a weaker pound, rose 1 percent, undermining potential demand for gold as a haven from risk.
Among other precious metals, silver was down 1 percent at $17.21 an ounce, while platinum was 0.8 percent higher at $939.25.
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