Gold slides to two-week low on talk of U.S. rate hike

By Jan Harvey

LONDON (Reuters) - Gold hit a two-week low on Monday as upbeat comments from Federal Reserve officials on the U.S. economy boosted expectations that the central bank could lift interest rates sooner rather than later.

The Fed's No.2 policymaker, Stanley Fischer, said on Sunday the Fed is close to hitting targets for full employment and 2 percent inflation.

That followed comments last week from New York Fed President William Dudley that the labour market is improving, and from San Francisco Fed chief John Williams that waiting too long to lift rates could be costly for the economy.

Gold is highly sensitive to rising U.S. interest rates, which boost the opportunity cost of holding non-yielding gold, while lifting the dollar, in which it is priced.

Spot gold was down 0.3 percent at $1,336.99 an ounce at 1330 GMT, while U.S. gold futures for December delivery were down $4.90 an ounce at $1,341.30.

"We definitely think the U.S. recovery is on track. Inflation is starting to pick up, employment is pretty much at the natural rate, so everything is coming together to suggest there's a very high probability of a rate hike before the end of the year," Dan Smith, analyst at Oxford Economics, said.

"I don't think that's wholly priced in (to gold). It does have the potential to have an impact," he said. "I don't see why we can't go below $1,300 before the end of the year."

Central bankers from around the world will gather from Aug. 25 for an annual meeting in the mountains of Jackson Hole, Wyoming, with Chair Janet Yellen due to speak the following day.

The dollar rose against the yen and euro on Monday as traders reassessed expectations for Fed action on rates after policymakers' comments last week. [FRX/]

"The firm U.S. dollar, rising bond yields and significantly higher rate hike expectations in the U.S. are apparently weighing on prices," Commerzbank said in a note. "According to the Fed Fund Futures, the probability of a U.S. Federal Reserve rate hike this year is now at over 60 percent again."

Speculators again cut their bullish positions in COMEX gold contracts in the week to Aug. 16.

The world's largest gold-backed exchange-traded fund, New York-listed SPDR Gold Shares, reported an outflow of 4.5 tonnes last week, adding to the near 20-tonne drop in its holdings the previous week.

Silver hit a seven-week low of $18.77 an ounce and was later down 1.7 percent at $18.95.

Platinum was down 0.4 percent at $1,105.60, while palladium was 0.3 percent lower at $706.

(Additional reporting by Nallur Sethuraman in Bengaluru; Editing by Susan Thomas and Adrian Croft)