By Deep Kaushik Vakil

(Reuters) - Gold prices traded around steady on Friday as they headed towards the end of their best year since 2020 at levels comfortably above $2,000 an ounce, buoyed by hopes the U.S. Federal Reserve could cut interest rates as early as March.

Spot gold steadied at $2,062.19 per ounce by 1:05 p.m. ET (1805 GMT). However, U.S. gold futures eased 0.6%, to $2,072.00.

Bullion has so far risen 13% in a year that saw prices swing between lows near $1,800 and a record high of $2,135.40.

"The ship is moving towards calmer waters, so to speak - a lower rate environment, which means a lower dollar, and so gold should do better," Marex analyst Edward Meir said.

Gold investors anticipate record-high prices next year, when the fundamentals of a dovish pivot in U.S. interest rates, continued geopolitical risk and central bank buying are expected to support the market.

"To see higher levels, we need to see stronger demand from investors, such as a pickup in ETF inflows. For that weaker U.S. economic data and lower inflation is needed, so that the Fed sounds more dovish," UBS analyst Giovanni Staunovo said.

Lower interest rates decrease the opportunity cost of holding non-yielding bullion and weigh on the dollar.

The dollar index was headed for a more than 2% decline in 2023, while benchmark 10-year Treasury yields were languishing near their lowest levels since July. [US/] [USD/]

"The rest of the precious metals complex hasn't shared in gold's good fortune and gold prices are quite elevated, given the nominal level of interest rates," said Tai Wong, a New York-based independent metals trader.

Spot silver fell 0.3%, to $23.87 per ounce, looking set for a small yearly decline.

Platinum fell 1.2%, to $990.25, while palladium dropped 2.6%, to $1,103.59. Both autocatalytic metals were on track for a yearly decline, with palladium down around 38% - its biggest drop since 2008.

The palladium market is in a surplus next year and not in a sweet spot for the future due to the shift to electric vehicles, which don't need the metal, Meir said.

(Reporting by Deep Vakil, Hissay Ongmu Bhutia and Swati Verma in Bengaluru; editing by Barbara Lewis and Pooja Desai)