Gold drops as Fed set to lay out rate hike path; Ukraine fears curb losses

By Asha Sistla

(Reuters) - Gold fell on Tuesday as the U.S. dollar and Treasury yields gained on expectations of faster U.S. rate hikes, but bullion held above its $1,830 key level as safe-haven assets were still in demand amid escalating tensions over Ukraine.

 

Spot gold XAU= fell 0.4% to $1,836.06 per ounce by 1031 GMT, while U.S. gold futures GCv1 slipped 0.3% to $1,836.20.

 

"Despite the Fed likely set to announce the start of a U.S. rate hike cycle this week, gold keeps holding up well. Support for the yellow metal comes from high inflation and elevated market volatility," UBS analyst Giovanni Staunovo said.

 

"Unless the Fed surprises with an even more hawkish statement, gold (could) stay supported," said Staunovo, adding that historically, gold outperforms equities when market volatility increases. .VIX (Full Story)

 

Risk appetite was dampened on concerns that Russia will invade Ukraine. NATO on Monday said it was putting forces on standby and reinforcing Eastern Europe with more ships and fighter jets. (Full Story)

 

U.S. benchmark 10-year yields recovered from last session's lows, while the dollar was close to two-week highs ahead of the Fed's two-day policy meeting starting later in the day. US/USD/ (Full Story)

 

The Fed is expected to signal on Wednesday that it plans to raise rates in March and offer insight into how aggressive the central bank intends to be. Rising interest rates increase the opportunity cost of holding non-interest bearing bullion. (Full Story)

 

Gradual rate hikes, accompanied by declining inflation, steady economic growth and stable markets may be the ideal scenario for U.S. monetary policy, but this is a difficult path to stay on, BofA Global Research said in a note.

 

"The risk of a policy mistake is high and rising equity volatility tends to support perceived safe havens, gold included."

 

Spot silver XAG= fell 1.1% to $23.70 an ounce. Platinum XPT= slipped 0.8% to $1,019.43.

 

Palladium XPD= rose 1.5% to $2,179.75, having jumped to the highest since Nov. 18.

 

(Reporting by Asha Sistla in Bengaluru; Editing by Shailesh Kuber)