Gold closes in on 5-1/2-year low as U.S. rate worries weigh

By Manolo Serapio Jr

MANILA (Reuters) - Gold dropped for a third session in four on Tuesday, closing in on a 5-1/2-year low, pressured by expectations that the Federal Reserve was well on course to raise interest rates this year.

While U.S. data on Monday suggested the world's largest economy may have lost some momentum in the past two months, economists believe the U.S. central bank was still set to lift rates this year. But the initial hike - the first in nine years - could be later than September when Fed policymakers meet next.

"I think it underscores our sense that the Fed may take a cautious approach, hence perhaps defer the first hike to December," said Vishnu Varathan, senior economist at Mizuho Bank in Singapore.

"The bigger picture is that an initial rate hike this year is not blown out of the water by any of the data that have come out so far. All it does is it reinforces that the pace of hikes as we go forward will be quite gradual and the way the Fed assesses policy will probably err on the side of caution," said Varathan.

Spot gold slipped 0.2 percent to $1,083.25 an ounce by 0259 GMT, near last month's low of $1,077, the weakest since February 2010. U.S. gold for December delivery fell 0.6 percent to $1,083.20 an ounce.

The U.S. Institute for Supply Management's index of national factory activity slipped to 52.7 in July, falling short of expectations, and U.S. consumer spending rose at its slowest pace in four months in June.

But an improving labour market means the Fed could still tighten policy, indicating further price losses for non-interest bearing gold.

Gold lost nearly 7 percent in July, its steepest monthly fall in two years, as the looming rate hike buoyed the dollar and spurred investors to cut their exposure to bullion.

A "delay in the Fed's rate hike expectations would be interpreted as bullion friendly", HSBC analyst James Steel wrote.

In other metals, spot platinum fell as much as 1.6 percent to $940.50 an ounce, its lowest since February 2009. Palladium hit $587.67 an ounce, its weakest since October 2012. Spot silver dipped 0.4 percent to $14.42 an ounce.

A key global commodities price benchmark sank to a 12-year low on Monday as fears about a hard economic landing in China and global glut deepened.

(Reporting by Manolo Serapio Jr.; Editing by Himani Sarkar)