Gold holds losses as dollar rallies on Fed rate hike view

Gold struggled to recover from overnight losses on Tuesday on expectations of a Federal Reserve rate hike next week and a robust dollar.

The metal was also hurt by a slide in commodity prices, particularly crude oil which was near 7-year lows as OPEC continues to pump near record oil to defend market share.

Spot gold had ticked up 0.3% to $1,073 an ounce by 0635 GMT, but not far from Monday's session low of $1,069.66. The metal slid 1.5% overnight.

"Plunging commodity prices and a stronger dollar set the stage for a retreat in gold prices," HSBC analyst James Steel said.

"Prices may stay on the defensive but further losses (are seen being) limited."

Further weakness in oil prices could trigger fears of deflation, a bearish factor for gold that is often seen as an inflation-hedge.

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

The dollar clung to gains from a two-day rally on Tuesday, after Friday's strong U.S. nonfarm payrolls data supported widely held market views that the Fed would hike interest rates for the first time in nearly a decade later this month.

Higher rates tend to drag on non-interest-paying gold by increasing the opportunity cost of holding it, while boosting the dollar.

Bullion has lost about 9.5% for the year, its third straight annual decline, on expectations of the rate hike.

Investor sentiment has been downbeat. Assets in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, tumbled 0.65% to 634.63 tonnes on Monday, the lowest since September 2008.

Speculators held a record high short position in COMEX gold futures and options in the week to Dec. 1, recent data showed.

Elsewhere, China's gold reserves rose by nearly 21 tonnes last month, the biggest purchase since it began disclosing monthly data on the stockpile earlier this year, central bank data showed on Tuesday.

Among other precious metals, silver steadied following a 2% drop overnight. Platinum edged up after a 3% drop on Monday, while palladium extended losses.