Gold snaps five-day rally on dollar gains, higher shares

By Clara Denina

LONDON (Reuters) - Gold snapped a five-day rally on Tuesday as the dollar rose sharply versus the euro and European shares gained after the European Central Bank suggested it may speed up its 1 trillion euro bond-buying campaign.

Steady U.S. 10-year bond yields and uncertainty ahead of the minutes from the latest Federal Reserve's policy meeting also weighed on sentiment towards gold.

As the metal pays no interest, the rise in returns from U.S. bonds and other markets is seen as negative because increases the opportunity costs of holding it.

Spot gold fell 0.5 percent to $1,220.20 an ounce by 0959 GMT, below a three-month high of $1,232.20 reached in the previous session.

"Once again we have not really managed to get a foothold above $1,225, we broke above it but we didn't really get any follow-through and the fact that we are seeing weakness after a few good sessions does not bode well," Saxo Bank senior manager Ole Hansen said.

"Near term, from a retracement perspective, $1,208 and $1,200 are the two levels to look at."

The metal had gained for five straight days to Monday after recent data on U.S. jobs, retail sales and consumer sentiment pointed to weakness in the economy and stoked speculation the Fed would not raise rates any time soon.

Interest rates at rock-bottom levels have benefited gold since the 2008-2009 financial crisis.

The dollar climbed over 1 percent against a basket of major currencies on Monday, while European shares also rose.

The turning point for gold prices could come on Wednesday with the release of the minutes of the Fed's last policy meet in April, traders said.

"The Fed minutes will be important, and as long as data continues to be on the weak side, there is not an aggressive expectation for a change in the rhetoric."

Markets are closely watching the minutes to gauge central bank officials' thinking on when U.S. interest rates could go higher.

But Chicago Fed President Charles Evans noted on Monday that the central bank could look at a rate hike in June if the economy was strong enough.

Potentially adding to arguments for raising interest rates sooner rather than later was a paper published on Monday by the San Francisco Fed that said the U.S. economy was probably not as weak as current estimates suggest.

A drop in holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, to a four-month low of 718.24 tonnes on Monday, also undermined investor appetite for the metal.

Silver dropped 1.6 percent to $17.39 an ounce. Platinum fell 0.6 percent to $1,162.50 an ounce, while palladium was down 0.5 percent at $782.45 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore)