LONDON (Reuters) - Gold edged up on Tuesday as the dollar crept lower after U.S. President Donald Trump's national security adviser Michael Flynn quit and investors awaited testimony from U.S. Federal Reserve Chair Janet Yellen.
Yellen's testimony could offer clues to the pace of interest rate increases in her first of two appearances, starting on Tuesday, at the Senate Banking Panel.
Interest rate futures showed investors pricing in only about a 20 percent chance the Fed will increase rates next month.
"We don't think there'll be a rate hike in March because it's unlikely the fiscal stimulus plan will be approved by then. The Fed is in wait-and-see mode ... (this) uncertainty is going to drive gold for the next couple of months," said Simona Gambarini, commodities economist at Capital Economics.
But she added: "We see rising inflation pressures (in the second half) so the Fed will be forced to hike rates."
Gold is highly sensitive to climbing U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion while boosting the dollar.
Spot gold was up 0.3 percent at $1,228.36 per ounce by 1058 GMT, while U.S. gold futures had gained 0.3 percent to $1,229.80.
Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.49 percent to 840.87 tonnes.
"With the market pricing rather a benign probability of a March rate hike (30-35 percent), risks are asymmetric into dollar favour," ING said in a note.
"If the status quo is retained ... dollar downside should be limited. On the other hand, if Yellen chooses to ... keep the option of a March hike on the table, the upside to the dollar should be more pronounced."
Dallas Fed President Robert Kaplan said on Monday the Fed should move soon to avoid falling behind the curve.
The dollar index was down 0.1 percent as Trump adviser Flynn quit over revelations he had discussed U.S. sanctions against Moscow with the Russian ambassador before Trump took office.
"(This) will be a year littered with political and economic minefields and we do not see a scenario where gold will experience a major sell-off back to the late 2016/early 2017 lows," INTL FCStone analyst Edward Meir said.
Gold has rallied nearly 10 percent after touching 10-month lows in December.
Spot silver climbed 0.5 percent to $17.87. The metal hit its highest since Nov. 11 at $18 on Monday.
Platinum rose 0.5 percent to $1,000.30.
Palladium gained 0.5 percent to $778.15, down from a two-week high hit on Monday.
(Additional reporting by Arpan Varghese in Bengaluru; Editing by Dale Hudson)