Gold drops to 7-week low on Fed rate hike prospects

[LONDON] Gold fell to a seven-week low on Wednesday after upbeat US home sales data in the previous session boosted expectations that the Federal Reserve will press ahead with interest rate hikes in the near term.

Bullion prices pared losses as the US dollar extended gains against a basket of major currencies.

Spot gold was down 0.2 per cent at US$1,223.93 an ounce at 3:18 pm EDT (1918 GMT), off an earlier low of US$1,217.25, the lowest since April 6. US gold futures for June delivery settled down 0.4 per cent at US$1,223.80 an ounce.

"It's been so highly correlated to what the dollar's been doing," said Nick Koutsoftas, portfolio manager for Cohen & Steers' commodities strategy in New York, explaining gold's inverse relationship to the US dollar.

Mr Koutsoftas noted that gold prices pared losses as the greenback fell after Markit's data showed its US Purchasing Managers Index for the services sector was lower than expected.

Gold prices have fallen more than 4 per cent since Fed meeting minutes last Wednesday revived expectations of an imminent rate increase. Gold is sensitive to rising interest rates, which increase the opportunity cost of holding non-yielding assets.

"Traders are of the mind-set that the Fed will increase the interest rate in June," said Naeem Aslam, chief market analyst at Think Forex.

The dollar hit a two-month high against a basket of currencies on Wednesday on expectations the Fed will raise rates in the near term, though it gave up gains against the euro on relief that there was progress in Greek bailout talks.

Growing confidence in a pick-up in US economic growth was fed on Tuesday by data suggesting new US single-family home sales have hit their highest in eight years.

Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, made the first decline in a month on Tuesday.

Price-sensitive gold buyers in Asia were active overnight, but were unable to consistently lift prices.

Elsewhere data from the International Monetary Fund showed regular official sector gold buyers China, Russia and Kazakhstan raised their bullion reserves again last month, while Venezuela sold off more of its holdings earlier this year.

Among other precious metals, silver was up 0.4 per cent at US$16.27 an ounce, after dipping to a five-week low of US$16.14 earlier in the session.

Palladium was down 0.3 per cent at US$530.51 an ounce, off a 12-week low of US$520.60 reached earlier in the day. Platinum was at US$992.790 per ounce, down 0.3 per cent, after touching a five-week trough of US$984.96.

BLOOMBERG