Gold dipped below an earlier two-month high on Friday as the dollar firmed, but the metal was still heading for its biggest weekly gain in a month as investors continued to cover short positions and on strong physical appetite from China.

Traders added that the crossing of a technical resistance level was also adding to buying, although the move upwards seen in the past week looked to have lost some momentum.

"After such a strong move up there is always the risk of a retracement... however after gold broke through its resistance at $1,350 last night things are looking somewhat more encouraging," Heraeus trader Alexander Zumpfe said.

"Expect initial resistance around the 100-day moving average at $1,375, which is slightly above today's intraday high."

Spot gold reached a two-month high of $1,372.51 an ounce earlier in the session but was at $1,360.01 an ounce, down 0.4 percent by 0944 GMT. It has risen around 3.5 percent so far this week, having gained for the last six sessions out of eight.

U.S. gold futures for December lost 0.1 percent to $1,360.40 an ounce.

Gold found technical support once prices crossed $1,350 on Thursday, traders said, as well as some safe-haven demand on escalating tensions in Egypt.

It had lost more than one percent after strong U.S. jobs data on Thursday indicated the Federal Reserve could soon start tapering its $85 billion monthly bond purchases.

An early end to the Fed's quantitative easing programme could hurt assets such as gold that had been boosted by central bank liquidity and a low interest rates environment, which encourages investors to put money into non-interest-bearing assets. The Fed's next policy meeting is on Sept. 17-18, while the July FOMC minutes will be released next Wednesday.

The dollar rose 0.1 percent, drawing support from a rise in U.S. Treasury yields around their highest in two years, hit on Thursday.

Holdings of SPDR Gold Trust, the world's largest gold-backed ETF, fell just 0.3 tonnes to 912.92 tonnes on Thursday. Rare inflows were seen in the fund twice over the past six sessions but holdings remain at four-year lows.

CHINA BUYING

Shanghai gold futures rose 2 percent on Friday, with premiums to London spot prices up about $3 overnight to $24, indicating strong demand ahead of the fourth quarter.

Analysts also expect demand to start returning in India in coming weeks, ahead of the winter wedding season and festival celebrations and despite government's imports restrictions.

"We expect to see increasing gold purchases by the manufacturing trade for stocks ahead of Christmas and harvest festivals," SP Angel said in a note.

Silver rose to its highest in almost three months at $23.15 an ounce, before trading down 0.6 percent to $22.81. The metal was heading for its best week since late October 2011, with gains of around 11 percent.

Platinum fell 0.4 percent to $1,515.50 an ounce and palladium dropped 0.5 percent to $755.08 an ounce.

(Additional reporting by Jan Harvey in London and A. Ananthalakshmi in Singapore; editing by Keiron Henderson)