Gold hovers near four-month low, undermined by firm dollar

By Pratima Desai

LONDON (Reuters) - Gold prices hovered near four-month lows on Tuesday and the dollar held firm on expectations of tighter U.S. monetary policy as the market awaited a speech from Federal Reserve Chair Janet Yellen this week.

Spot gold was down 0.2 percent at $1,212.09 an ounce at 1346 GMT, near Monday's $1,204.45, its lowest since March 15. U.S. gold futures slipped 0.2 percent to $1,211.1 an ounce.

A higher U.S. currency makes dollar-denominated commodities more expensive for holders of other currencies, which could subdue demand.

"The recent drop in gold to a large extent reflects the market pricing in additional tightening from central banks," Danske Bank analyst Jens Pederson said.

"But we are at the lower end of the range for gold prices ... It could be a buying opportunity if tensions with North Korea escalate."

Gold prices are down more than 6 percent from a seven-month high near $1,300 hit in June.

Perceptions that an era of ultra-cheap money is gradually ending have been reinforced by European Central Bank minutes showing policymakers are open to reducing monetary stimulus.

The Bank of Canada is expected to raise rates on Wednesday. Yellen delivers a semiannual monetary policy testimony to lawmakers at 1400 GMT on Wednesday and Thursday.

The dollar rose against the basket of currencies used to measure its broader strength, hitting a four-month high against the yen on the past fortnight's 25-basis-point rise in 10-year U.S. government bond yields.

Higher U.S. interest rates and Treasury bond yields raise the opportunity cost of holding gold, which yields nothing and costs money to store and insure.

"The pullback in gold has coincided with the rise in U.S. real yields to the year's highs as well as the sharp increase in real yields in Europe to the highest levels in more than a year," UBS analysts said in a note.

"Gold should recover from this latest pullback as the move higher in real rates is unlikely to be sustained and we see longer-term value around these levels."

On the technical front, support for gold comes in at $1,200 followed by $1,195, near the low on March 10. Upside resistance comes in at the 200-day moving average near $1,230.

An investor retreat from gold can be seen in holdings of physically backed exchange-traded funds, which at 54.61 million ounces are down more than 1 percent since June 14.

Elsewhere, silver gained 0.4 percent to $15.69 an ounce, palladium ceded 0.3 percent to $836.99 and platinum slid 0.5 percent to $895.7.

(Additional reporting by Nithin Prasad and Arpan Varghese in Bengaluru; Editing by Jon Boyle and Louise Heavens)