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Gold drops on stronger dollar

Key Points
  • German politics boost dollar against euro
  • Prospect of higher U.S. rates creates headwind for gold
  • Platinum slips after marking near two-month high on Friday

Gold dropped on Monday as the dollar rose but political and economic uncertainty in the United States continued to dominate sentiment.

Spot gold was down 1.43 percent at $1,275.80 an ounce, off Friday's peak of $1,297, its strongest since Oct. 16. U.S. gold futures for December settled down at $1,275.30 an ounce.

The dollar gained against the euro after German Chancellor Angela Merkel's efforts to form a three-way coalition government failed. Merkel said she would inform the German president that she could not form a coalition, after the pro-business Free Democrats (FDP) withdrew from negotiations.

The prospect of higher U.S. interest rates in December when the Federal Reserve meets was also helping the dollar against other major currencies such as the yen.

"For gold, there are headwinds in the guise of U.S. interest rate rises, which means higher front-end bond yield curves and an opportunity cost for holding gold," said Societe Generale analyst Robin Bhar.

Higher rates typically mean sales of short-dated bonds, pushing up yields and make them cheaper for other investors, offering higher returns than gold which earns nothing and costs money to store and insure.

"Against the backdrop of overall benign financial markets, gold has been soft for most of this year, mirroring overall demand weakness in the physical gold market," Julius Baer analysts said in a note. However, concern about an investigation into alleged Russian meddling in the 2016 U.S. presidential election and tax reforms in the United States were expected to help sustain gold.

"Attention has shifted to (the tax bill's) prospects in the Senate where we think the measure faces a more uncertain path," INTL FCStone analyst Edward Meir said in a note.

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On the technical front, gold is struggling to hold above the 55-day moving average at around $1,291. Further resistance comes in at $1,297, the high on Friday.

Silver was down 2.3 percent at $16.89 an ounce and platinum fell 3.1 percent to $921.24. Palladium dropped 0.56 percent to $987.70 an ounce.

Traders said palladium could come under pressure from news that Norilsk Nickel is planning to boost purchases of palladium for its fund from Russian central bank reserves to help ease shortages in the market. An executive at Norilsk, the world's largest palladium producer, told Reuters that purchases in 2017 would rise to as much as 600,000 ounces. This compares with about five tonnes (160,764 ounces) last year.