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Gold falls as strong data points to central bank tightening

PROSPECTING GOLD
AP

Gold prices fell for a third day on Monday to their lowest since mid-March after strong economic data in the United States and Germany bolstered expectations that central banks will raise interest rates.

Gold is highly sensitive to rising rates because they push up bond yields, increasing the opportunity cost of holding non-yielding bullion. They also tend to boost the dollar, in which gold is priced.

Spot gold, which dropped 2.3 percent last week, was up 0.05 percent at $1,213.41 per ounce, having earlier touched $1,204.45, its lowest since March 15.

U.S. gold futures for August delivery settled at $1,213.20 per ounce.

"On the mind of the gold market is central bankers striking a more hawkish tone. Investors are now pricing in monetary tightening from most central banks," said Danke Bank analyst Jens Pedersen.

The rationale for tightening was bolstered by better than expected U.S. jobs data and strong German export figures.

Read more: This chart shows that gold is now at a 'treacherous' level

These also fueled optimism about the global growth outlook, boosting stock markets and the dollar, encouraging investors to ditch gold for riskier assets.

Markets were looking ahead to Wednesday and Thursday, when U.S. Federal Reserve Chair Janet Yellen addresses Congress.

U.S. 10-year bond yields have risen sharply since late June and are near two-month highs, while gold is down nearly 7 percent from a high of $1,295.97 a month ago.

Investors have sharply scaled back bets on higher prices, reducing their net long positions in COMEX gold in the week to July 3 by more than half to the smallest bullish stance since January.

Holdings of gold at the world's largest bullion-backed exchange-traded fund, SPDR Gold Trust, fell 2 percent in the week to Friday.

However, expectations of higher rates have now been priced in and gold is unlikely to fall much further, Pedersen said.

Analysts at Standard Chartered said that investors should buy at about $1,200 because Indian demand, which was dented by a new sales tax, is likely to recover and U.S. interest rates are expected to rise slowly over the next few years. Technical support for gold was at $1,200 and $1,195, the March low, ScotiaMocatta analysts said in a note.

Hedge funds and money managers in the week to July 3 reduced their net long positions in COMEX gold and silver for a fourth straight week, U.S. Commodity Futures Trading Commission (CFTC) data showed on Friday.

Among other precious metals, silver was up 0.32 percent to $15.63 an ounce after touching $15.16. Prices are at their lowest since April last year and investors' net long position in silver in the week to July 3 fell to its lowest since December 2015.

Palladium was down 0.6 percent at $833.35 and Platinum slipped 0.8 percent to $896.60 an ounce.