Gold drops to seven-week low on Fed rate hike prospects

By Koustav Samanta

BENGALURU (Reuters) - Gold dropped to a seven-week low on Wednesday, driven by expectations of an early interest rate hike by the U.S. Federal Reserve.

Bullion has taken a beating from the prospect of an imminent rate increase, as indicated by Fed meeting minutes released last week. Gold is sensitive to interest rates, gains in which raise the opportunity cost of holding the non-interest-yielding asset.

Spot gold was down 0.2 percent at $1,223.96 per ounce by 0611 GMT. The metal fell to $1,222.85 earlier in the session, its lowest since April 7.

U.S. gold futures dipped 0.4 percent to $1,224.30.

"I think gold prices will touch the $1,200 level in the coming few days. The change in rate hike expectations is still the major theme, but after the end of June the overall sentiment on the rate hike will be pretty much done," said Mark To, head of research at Hong Kong's Wing Fung Financial Group.

Adding to the woes of the safe-haven bullion, the dollar stood near a two-month peak against a basket of major currencies on Wednesday after robust U.S. housing data supported the case for the Fed to raise rates in the near term.

A stronger greenback makes dollar-denominated gold more expensive for holders of other currencies.

The growing confidence towards a pick-up in U.S. economic growth got a boost on Tuesday as official data suggested new U.S. single-family home sales have hit the highest in eight years.

The recent negative undertone for gold notwithstanding, some analysts believe a rate increase as early as June seems unlikely and would be discounted by traders, stabilising the yellow metal.

"Despite the short term negative pullback, gold is still a strong 2016 performer against a range of alternative assets and these levels are an enticing entry price for long-term bulls," said MKS Group trader James Gardiner.

Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.44 percent to 868.66 tonnes on Tuesday, the first decline in a month.

Among other precious metals, spot silver rose 0.2 percent, to $16.24 an ounce. It dipped as low as $16.14 earlier in the session, its lowest in five weeks.

Spot palladium rose 0.4 percent, to $534.23 an ounce, after hitting a twelve-week low of $528.97 earlier in the day. Spot platinum was trading at $995 per ounce after touching a five-week trough of $992.

(Additional reporting by Vijaykumar Vedala in Bengaluru; Editing by Joseph Radford and Sherry Jacob-Phillips)