Gold drops on firmer dollar, higher bond yields

  • Spot gold may fall to $1,316/oz — technicals
  • SPDR Gold holdings down 0.2 pct on Monday
  • Investors await Fed meeting for rate hike cues
Gold bullion bars and coins.
Getty Images
Gold bullion bars and coins.

Gold fell for a second straight session on Tuesday, hitting its lowest in a week, as the dollar strengthened and U.S. bond yields rose, while traders awaited a U.S. Federal Reserve policy meeting for cues on interest rate hikes this year.

Spot gold was down 0.4 percent at $1,335.49 per ounce, as of 0710 GMT, after a 0.7 percent drop in the previous session. Earlier in the day, the bullion hit its lowest since Jan. 23 at $1,334.10.

U.S. gold futures were 0.5 percent lower at $1,335.20 per ounce.

Gold prices gained 2.5 percent so far this month, largely due to a weak dollar. The greenback posted its sixth straight weekly drop last week, hitting a three-year low on Friday, and is on track for its biggest monthly decline since March 2016.

The Fed is widely expected to keep interest rates unchanged at its two-day policy meeting that starts later in the day. Investors, however, will be focusing on the central bank's assessment of the economy and inflation for hints on the monetary policy outlook.

Gold prices have risen over 8 percent since the last Fed meeting in December.

"Surprisingly, gold has completely dislocated from its negative correlation to real interest rates, with both up since the last Fed meeting... We believe this dislocation is more a temporary phenomenon than a change in regime," UBS analysts said in a note.

"This week's Fed meeting and U.S. jobs report may well be the catalyst to a re-establishment of the historical negative correlation between U.S. real rates and gold, as both data points are likely to support the ongoing monetary policy tightening in the U.S."

U.S. Treasury yields surged to more than three-year highs on Monday after comments from a European Central Bank official added to expectations that central banks globally will reduce stimulus as the economic outlook improves.

Rising bond yields helped underpin the greenback ahead of a week packed with U.S. data. The dollar index, which measures the greenback against a basket of currencies, rose 0.2 percent to 89.513.

The sudden repricing in global bond markets caught a consolidating gold market off guard, triggering profit-taking, said Stephen Innes, APAC trading head for OANDA.

Spot gold may break a support at $1,335 per ounce and fall more towards the next support at $1,316, as suggested by its wave pattern and a Fibonacci retracement analysis, according to Reuters technical analyst Wang Tao.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.17 percent to 846.67 tonnes on Monday from 848.14 tonnes on Friday.

Among other precious metals, silver slipped 0.2 percent to $17.12 an ounce.