Gold set for first monthly drop since December as Fed rate hike likely

Gold fell for a third day on Wednesday, set for its first monthly drop since December, as US economic data boosted the case for an interest rate hike by the Federal Reserve next month.

US consumer spending recorded its biggest increase in four months in April and monthly inflation rebounded, pointing to improving domestic demand that could allow the Federal Reserve to raise interest rates next month.

Spot gold was down 0.3 percent to $1,259.51 per ounce at 0330 GMT. Prices fell by the same amount on Tuesday after earlier rising to a one-month high of $1,270.47. For the month, bullion is set to drop 0.6 percent.

US gold futures dipped 0.3 percent to $1,258.90.

"U.S. employment data coming this Friday and its affects on the Fed rate hike decision next month will be crucial," said Yuichi Ikemizu, Tokyo branch manager at ICBC Standard Bank.

A US rate hike is probably coming soon though the Federal Reserve may want to delay if inflation remains soft, Fed governor Lael Brainard said on Tuesday.

Interest rate futures on Tuesday are indicating a nearly 89 percent chance of a June hike, according to CME Group's FedWatch tool.

Higher rates would reduce the demand for non-interest bearing bullion as well as boosting the US dollar in which gold is priced.

Political tensions in the US and Europe continue to support gold and have prevented any major losses for the metal, Ikemizu said.

British Prime Minister Theresa May's Conservative Party risks falling short of winning an overall majority of seats in parliament in a national election on June 8, The Times newspaper said on Tuesday, quoting research by polling firm YouGov.

In Italy, the 5-Star Movement voted over the weekend in favour of a proportional electoral system, raising the chances of an unprecedented autumn parliamentary election.

Spot gold may break a support at $1,257 per ounce and fall to the next support at $1,245, according to Reuters technical analyst Wang Tao.

"The extended short term long positioning and a lack of upside momentum may be signalling that a correction lower may be on the cards," said Jeffrey Halley, a senior market analyst at OANDA.

In other precious metals, silver slipped 0.6 percent to $17.26 an ounce though it is set to rise 0.4 percent for the month.

Platinum was up 0.5 pct at $939.45 an ounce after falling 1.9 percent in the previous session in its biggest one-day percentage loss in nearly a month.

Palladium was up 0.1 percent at $805.60 an ounce and was on track for a monthly decline of 2.1 percent, its first monthly decline this year.