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

Melted gold flows out of a smelter into a mould of a one kilogram bar at a plant of gold refiner and bar manufacturer Argor-Heraeus SA in the southern Swiss town of Mendrisio.
Arnd Wiegmann | Reuters
Melted gold flows out of a smelter into a mould of a one kilogram bar at a plant of gold refiner and bar manufacturer Argor-Heraeus SA in the southern Swiss town of Mendrisio.

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

The metal has fallen more than 4 percent 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.

Spot gold was down 0.17 percent at $1,224.46 an ounce, off an earlier low of $1,217.25. U.S. gold futures for June delivery settled down $5.40 at $1,223.80 were last down $4.40 at $1,224.80.

"The economic data is firming up in the US and this is making the dollar stronger," Naeem Aslam, chief market analyst at Think Forex, said. "Traders are of the mind-set that the Fed will increase the interest rate in June."

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 U.S. economic growth was fed on Tuesday by data suggesting new U.S. single-family home sales have hit their highest in eight years. Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell 3.9 tonnes on Tuesday to 868.66 tonnes, its first decline in a month.

"It all does hinge on the Fed's intentions for June," Mitsubishi analyst Jonathan Butler said.

"We had surprisingly hawkish minutes last week which put the June rate rise back on the cards. That certainly has made life tough for gold, because the dollar's rallied, 2-year Treasury yields have rallied, even 10-year yields have rallied somewhat."

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 futures were up 0.5 percent at $16.33 an ounce, after dipping to a five-week low of $16.14 earlier in the session.

Palladium futures were down 1.07 percent at $532.20 an ounce, off a 12-week low of $520.60 reached earlier in the day. Platinum futures were at $994.50 per ounce.