Gold slides to lowest since February as Fed strikes hawkish note

By Jan Harvey

LONDON (Reuters) - Gold hit its lowest since early February on Thursday after the Federal Reserve sounded an unexpectedly hawkish note on U.S. interest rates, sparking a surge in Treasury yields and sending the dollar to a 14-year high.

Lifting the federal funds rate to a 0.50-0.75 percent range on Wednesday, the U.S. central bank flagged a faster pace of hikes next year as it geared up for the incoming Trump administration's pledges to cut taxes and boost spending.

That sparked a rally in the dollar, pressuring assets priced in the currency, while U.S. Treasury yields soared, lifting the opportunity cost of holding non-yielding gold.

Spot gold hit a 10-1/2 month low of $1,126.48 an ounce, and was down 1.2 percent at $1,130.55 an ounce by 1230 GMT. U.S. gold futures for February delivery were $30.80, or 2.7 percent, lower at $1,132.90.

"The rate hike was pretty much priced in, so what gold is really reacting to is the anticipation of three rate hikes next year instead of two," UBS analyst Joni Teves said.

"The pressure on gold is understandable if you look at yields, if you look at the dollar. As long as yields are high, gold is going to struggle."

The metal had already fallen sharply in the run-up to the Fed meeting after Republican candidate Donald Trump's election to the U.S. presidency sparked a rally in the dollar and a rise in assets seen as higher risk, like stocks, at gold's expense.

It saw its biggest monthly drop since mid-2013 in November, and has fallen 10 percent since the U.S. election.

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, are down about 10 percent from mid-November. Holdings fell again on Wednesday, by 6.8 tonnes.

"The sell-off in ETFs is the result of lack of investor appetite in the gold markets," ANZ analyst Daniel Hynes said. "The weak physical markets in China and India are not really helping gold."

Indian demand has suffered from a cash crunch in recent weeks after officials suspended the use of some bank notes, while Chinese traders say the People's Bank of China has limited imports into the world's biggest gold market.

Meanwhile, silver was down 3.9 percent at $16.17 an ounce, having earlier hit its lowest since June at $16.05, and platinum was 0.9 percent lower at $915.40.

Palladium, bucking the trend among the major precious metals, was up 0.2 percent at $721. The white metal is mainly used in autocatalysts, and tends to be more broadly correlated to other cyclical assets than gold, silver and platinum.

(Additional reporting by Swati Verma and Nallur Sethuraman in Bengaluru, editing by David Evans)