Gold drops as Fed's Williams says he's for increasing rates soon

[SINGAPORE] Gold dropped, snapping a four-day winning run, as the dollar rebounded and a Federal Reserve policy maker said the US economy is strong enough to warrant an increase in interest rates soon, warning that waiting too long risks high inflation or asset bubbles.

Bullion for immediate delivery fell as much as 0.5 per cent to US$1,345.80 an ounce and traded at US$1,348.50 at 2:46 pm in Singapore, according to Bloomberg generic pricing, as a gauge of the greenback climbed 0.3 per cent. The metal remains 0.9 per cent higher this week.

While the Fed's hesitation in raising rates this year has helped boost gold by 27 per cent, recent comments have raised the possibility of a move before year-end.

Fed Bank of San Francisco President John Williams said on Thursday it makes sense to get back to a pace of gradual increases, preferably sooner rather than later. Investors will look for further clues as Chair Janet Yellen speaks Aug 26 at an annual gathering in Jackson Hole, Wyoming.

"With the market looking forward to Jackson Hole, we wouldn't be surprised to see the metal remain range-bound," said Jordan Eliseo, Sydney-based chief economist at trader Australian Bullion Co.

While gold has no lack of supportive factors, a rally in risk assets, greater chances of another hike from the Fed, a drop in net long positions in four of the last five weeks, and minor outflows from gold-backed funds have all limited the upside, according to Mr Eliseo.

The net-long position in gold futures and options fell 4.3 per cent to 255,773 contracts in the week ended Aug 9, according to Commodity Futures Trading Commission data released three days later.

Exchange-traded fund holdings fell for a second day as of Thursday, data compiled by Bloomberg show.

While the probability of a hike this year ticked up earlier in the week after New York Fed President William Dudley flagged the possibility of tightening as soon as next month, minutes of the central bank's last meeting released Wednesday struck a more dovish tone, pushing the odds back below 50 per cent. Societe Generale SA isn't expecting any increases in US borrowing costs this year.

"The delay in the Fed rate hike profile has been a significant factor in our positive outlook for gold in the near term, as much of the weakness throughout 2014 and 2015 has been a function of policy normalisation and a stronger dollar," said Mark Keenan, head of commodities research for Asia at SocGen. Prices may rise to US$1,400, he said.

In China, bullion of 99.99 per cent purity fell 0.1 per cent to 288.66 yuan a gram on the Shanghai Gold Exchange.

On the Shanghai Futures Exchange, gold for December delivery was little changed at 289.25 yuan a gram, while silver dropped 0.4 per cent to 4,366 yuan a kilogram.

Silver declined 0.6 per cent, platinum retreated 0.7 per cent and palladium fell 0.4 per cent.

BLOOMBERG