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Gold drops more than 1 per cent as dollar rally continues

Tuesday, May 26, 2015 - 18:34
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Gold fell more than 1 per cent on Tuesday as the dollar extended gains following stronger US inflation data and comments from Federal Reserve Chair Janet Yellen that reinforced the central bank's tightening bias on monetary policy.

[LONDON] Gold fell more than 1 per cent on Tuesday as the dollar extended gains following stronger US inflation data and comments from Federal Reserve Chair Janet Yellen that reinforced the central bank's tightening bias on monetary policy.

Spot gold dropped to a two-week low of US$1,192.60 an ounce earlier and was down 1 per cent at US$1,193.73 by 1003 GMT.

US gold futures for June delivery were down US$10.40 at US$1,193.60 an ounce.

The dollar continued its strong run, up 1 per cent against a basket of leading currencies, after Fed Yellen said on Friday that interest rates will be raised this year as the US economy was set to bounce back from an early-year slump. "The dollar is back in vogue, it's turned after last week's strong CPI data, Yellen comments, and there should be more strong data this week," Societe Generale analyst Robin Bhar said. "For the dollar to weaken again, you're going to need some pretty dire US data and the risk is that data is going to get stronger because we are out of the winter season." A stronger dollar makes gold more expensive for holders of other currencies, while higher US interest rates would dent demand for the non-interest-paying metal, increasing the opportunity cost of holding it.

Gold's inverse correlation with the dollar has started to strengthen again, and weaken against yields, Barclays said in a note. "We maintain the view that the third quarter is likely to be the weakest quarter for gold, given that we expect the Fed to start increasing rates in September, but the potential downside is likely to be limited," it said.

Bullion traders will be keenly eyeing US economic data due later in the day, including durable goods for May and consumer confidence for April, for clues on the strength of the economy and how it would impact the Fed's monetary policy.

The focus was also on Greece, which said on Monday it needed aid urgently to be able to pay a loan instalment due next week.

Any worsening of the Greek debt crisis could potentially trigger demand for gold coins and bars. The metal is usually seen as a hedge against political and financial risk, although the impact on demand for metals from wider political worries is usually short lived.

Silver fell 2.1 per cent to a two-week low of US$16.70 an ounce. Platinum dropped 1.7 per cent to US$1,128.50 an ounce and palladium slipped 0.6 per cent to US$781 an ounce.

REUTERS