Gold hits 3-1/2 week low as U.S. rate hike outlook weighs

By Jan Harvey

LONDON (Reuters) - Gold fell to a 3-1/2 week low on Tuesday as hawkish comments from Federal Reserve officials in the previous session sent the dollar to a two-month high against a currency basket.

The prospect of an early rate hike, as indicated by Fed meeting minutes released last week, and a strengthening dollar have pushed gold down nearly 4 percent so far in May, putting it on track for its biggest monthly decline since November.

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

Spot gold was down 0.6 percent at $1,241.80 an ounce at 1140 GMT, while U.S. gold futures for June delivery were down $9.40 an ounce at $1,242.10.

"We had more hawkish noises yesterday, with a trio of Fed speakers lining up to say that June or July are live meetings for considering a rate increase," Societe Generale analyst Robin Bhar said.

"The dollar's in the ascendancy this morning, against the euro and the basket as well, and gold is coming under pressure. We've lost sight of the $1,250 level, which was holding things up pretty well. We'll be looking to hold here -- if not, we could get back to the low $1,200s."

Senior Fed officials on Monday said that rates being kept too low for too long could cause financial instability, and that the U.S. central bank would continue with rate increases next year.

The Fed's policymakers are scheduled to speak this week and are expected to back the case for a rate hike within months. Fed Chair Janet Yellen will be at a panel event hosted by Harvard University on Friday.

Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, rose 0.38 percent to 872.52 tonnes on Monday.

"There appears to be good demand for gold at $1,243-44 so it will be interesting to see whether this level will prove to be a triple bottom," MKS said in a note. "If it does break through convincingly, there could be a fresh wave of liquidation."

Meanwhile, silver was down 0.3 percent at $16.26 an ounce, after earlier hitting a five-week low of $16.19, while platinum was down 0.4 percent at $1,005.21 per ounce, off a four-week low of $1,000.

Palladium was down 0.6 percent at $544.50 an ounce, having hit a near six-week trough of $541.75 earlier in the session.

(Additional reporting by Vijaykumar Vedala and Koustav Samanta in Bengaluru; Editing by Alexandra Hudson)