Gold falls to 10-month low on Fed rate hike bets

By Zandi Shabalala

LONDON (Reuters) - Gold prices sank to their lowest in more than 10 months on Monday, hit by expectations of an increase in U.S. interest rates this week that boosted U.S. Treasury yields.

Spot gold fell 0.15 percent to $1,155.66 per ounce by 1251 GMT after hitting its lowest since Feb. 5 at $1,151.34 an ounce, clocking the third straight session of declines.

U.S. gold futures also reached a 10-month low, easing 0.4 percent to $1,157.60 per ounce.

The Federal Reserve is widely expected to hike interest rates for only the second time in a decade at a two-day meeting that begins on Tuesday. But bets are now being placed on the timing of rate hikes next year.

"The Fed's statement is much more important on this occasion than the rate hike because its been very widely expected that rates will increase at this meeting," said ICBC Standard Bank analyst Tom Kendall.

"It's unlikely that the Fed would do anything different to what's expected so it is going to be about what the tone of that statement is about growth next year."

Markets were pricing in a nearly 100 percent chance for a quarter percentage point increase to the Fed's target range.

The dollar index, which measures the greenback against major currencies, hovered near 10-month highs as the oil prices soared.

Putting further pressure on gold was the rise in the benchmark 10-year U.S. Treasury yield to a two-year high.

As gold pays no interest, the rise in returns from U.S. bonds is seen as negative for the metal.

Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding assets such as bullion, while boosting the dollar, in which it is priced.

Recent softness in the gold price was ascribed to a jump in the dollar and Treasury yields after Donald Trump's surprise election to the U.S. presidency last month.

Holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.38 percent to 857.45 tonnes on Friday. Holdings have dropped about 9 percent since November.

Hedge funds and money managers trimmed their net long positions in gold and silver for the fourth week in a row, U.S. Commodity Futures Trading Commission data showed on Friday. In gold, they cut their net long position by 22,578 lots to 80,814.

Silver was steady at $16.85 an ounce, while platinum was up 0.3 percent to $917.45. Palladium rose 0.9 percent at $723.47.

(Additional reporting by Swati Verma and Nallur Sethuraman in Bengaluru; Editing by Mark Potter and Louise Heavens)