Gold drops as dollar rises in expectation of U.S. rate hike

By Sethuraman N R

REUTERS - Gold prices fell on Thursday as the dollar strengthened on growing expectations of a Federal Reserve rate hike in December following positive U.S. economic data.

Spot gold was down 0.2 percent at $1,185.55 an ounce by 0606 GMT. It dropped 2 percent in the previous session to touch its lowest in 9-1/2 months at $1,181.45.

U.S. gold futures eased 0.3 percent to $1,185.60 per ounce.

Fed policymakers appeared confident on the eve of the U.S. presidential election that the economy was strengthening enough to warrant interest rate increases soon, minutes from the Fed's Nov. 1-2 meeting showed.

"There is a downtrend for gold prices due to interest rate hike expectations," said Mark To, head of research at Hong Kong's Wing Fung Financial Group. He added that he saw a "100 per cent" chance of a rate increase in December.

"Some of the largest ... investment figures have been winding down their long positions in gold in the past quarter. We are going to see many more followers. It is not a good idea to trade for a rebound in prices," To said.

New orders for U.S. manufactured capital goods rebounded in October, driven by rising demand for machinery and a range of other equipment, the latest indication of an acceleration in economic growth early in the fourth quarter.

Recent positive economic data has been pressuring gold prices as investors raise bets on a U.S. interest rate hike that would increase the opportunity cost of holding non-yielding bullion, while boosting the dollar.

Investors are now pricing in a nearly 100 percent probability of a December Fed rate increase, according to CME FedWatch, and some investors expect more hikes in 2017 if economic momentum is sustained.

The dollar index, which measures the greenback against a basket of currencies, was on Thursday near its highest in 14 years, a level that it touched overnight.

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 1.47 percent to 891.57 tonnes on Wednesday from Tuesday. Holdings have declined over 5 percent so far this month.

Gold prices have dropped nearly 12 percent from a high of $1,337.40 per ounce, hit on Nov. 9, when Donald Trump was announced U.S. president-elect.

"Since no one particularly anticipated the move post the Trump win, the position cutting on the long-side has been swift on the downside," said Amit Kumar Gupta, research head at Adroit Financial Services, adding that the market has piled into the U.S dollar and equities.

"Technically, $1,172 will act as support, below which the down move could be aggressive."

Spot silver fell 0.6 percent to $16.26 an ounce. Platinum dropped over 1.3 percent to $918.40, while palladium edged up 0.2 percent to $734.40.

(Reporting By Nallur Sethuraman in Bengaluru; Editing by Richard Pullin and Joseph Radford)