A gold bar on display in a shop window in the Gold Souk in the Deira district of Dubai, United Arab Emirates Image Credit: Bloomberg

Gold prices rallied over 2 per cent on Thursday to a more than two-month high as data showed US inflation cooled off a bit in October, lifting hopes that the Federal Reserve would adopt a less aggressive approach to rate hikes.

The U.S. consumer price index (CPI) rose 0.4 per cent last month after climbing by the same margin in September, the Labor Department said. Economists polled by Reuters had forecast an advance of 0.6 per cent.

Spot gold climbed 2.7 per cent to $1,751.61 per ounce by 13:44 EDT (1844 GMT). U.S. gold futures settled up 2.3 per cent at $1,753.7.

"When we start to see inflationary data showing that inflation is coming down, there is an expectation that the Fed is going to begin to slow the pace of those interest rate hikes," said David Meger, director of metals trading at High Ridge Futures.

"Hence you could argue that the dramatic pressure that has been applied to the gold market over the last several months has been released and gold now has the ability to move higher." Following the U.S. data, the dollar dropped 2 per cent to a near two-month low, making gold less expensive for other currency holders. Benchmark U.S. 10-year Treasury yields slipped to a one-month low.

Fed fund futures are now pricing in a 73.5 per cent chance of a 50-basis-point hike at the Fed's policy meeting in December.

Gold is highly sensitive to U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion.

"A cool inflation report has made markets confident that the Fed can downshift to half-point rate hiking pace and possibly be done with tightening after the March FOMC meeting," said Edward Moya, senior analyst with OANDA, in a note.

"Gold is breaking out here and it could have a steady path towards the $1,800 level if dollar weakness remains." Silver advanced 3.1 per cent to $21.65 per ounce. Platinum jumped 5.4 per cent to $1,038.09, its highest since March.

Palladium rallied 5.5 per cent to $1,966.50.