Gold steadies, higher U.S. rates expected to weigh

By Pratima Desai

LONDON (Reuters) - Gold steadied on Monday as the dollar slipped, but higher interest rates in the United States and a weak physical market are expected to weigh on prices of the precious metal.

Spot gold was up 0.1 percent at $1,242 an ounce by 1347 GMT, having marked its lowest since Dec. 12 at $1,236.58 on Friday. U.S. gold futures were 0.1 percent up at $1,241.8 an ounce.

A lower U.S. currency makes dollar-denominated gold cheaper for holders of other currencies, which could boost demand.

The U.S. Federal Reserve last month raised its benchmark overnight lending rate by 25 basis points to 1.75-2.0 percent. Expectations are for another two rate rises this year and three in 2019. [FED/R]

Gold does not earn any interest or dividends and costs money to store and insure.

"While interest rates were zero there was no real cost to holding gold, it was just like holding cash. Now there is a cost," said Macquarie analyst Matthew Turner.

"The lack of big compelling themes is a problem for gold. Prices are very high compared with before the GFC (great financial crisis) and investor demand isn't there."

The financial crisis escalated after U.S. investment bank Lehman Brothers filed for bankruptcy in September 2008, when gold prices were around $900 an ounce.

Investors retreating from gold can be seen in the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust. The fund's holdings have fallen more than 8 percent since late April to less than 26 million ounces.

Physical market demand in top consuming countries China and India is also weak, analysts say.

India's gold imports fell for a sixth month in June to 44 tonnes as a drop in the rupee lifted local prices to their highest in nearly 21 months, curtailing demand.

"Indian and China retail consumption has been hindered by depreciating local FX," Citi analysts said in a note.

"Investors may favour gold again, especially if trade friction rises further and becomes a more sizeable threat to economic growth and to the decade-long equity market bull run."

Silver was unchanged at $15.78 an ounce after hitting a seven-month low at $15.67 on Friday.

Platinum slipped by 0.3 percent to $823 an ounce and palladium was down 1.1 percent to $926.70 from an earlier $921.20, the lowest since April 9.

However, analysts expect palladium prices to remain supported.

"The palladium market remains in deficit -- our indicators suggest that palladium remains the tightest it has been in about 20 years -- and is expected to remain in deficit," Citi analysts said.

Citi expects a palladium market deficit of 458,000 ounces this year and a 608,000 shortfall next year.

(Additional reporting by Apeksha Nair in Bengaluru; Editing by Adrian Croft and David Goodman)