Gold holds near three-and-a-half week low as U.S rate hike outlook drags

By Vijaykumar Vedala

BENGALURU (Reuters) - Gold dipped on Tuesday to trade near a 3-1/2 week low hit in the previous session, pressured by expectations that the U.S Federal Reserve will raise interest rates sooner rather than later.

The prospect of an early rate hike, as indicated by Fed meeting minutes released last week, and a strengthening dollar have pushed down bullion by 3.6 percent so far in May, on track for its biggest monthly decline since November.

Gold is sensitive to interest rates, gains in which raise the opportunity cost of holding non-yielding bullion.

Spot gold had fallen 0.3 percent to $1,244.91 per ounce by 0332 GMT. The metal on Monday dropped to its lowest since April 28 at $1,242.63 an ounce.

U.S. gold futures eased 0.5 percent to $1,245.60 per ounce.

"Over the next two weeks ... if the economy is on the firm side in the U.S. and the Fed is ready to move, maybe July at the earliest, then I would say gold is ready to see a correction," said analyst Dominic Schneider of UBS Wealth Management in Hong Kong.

"I definitely think gold can fall back below $1,200 in the coming one or two months."

Senior Fed officials on Monday said that rates being kept too low for too long could cause financial instability and that the U.S. central bank would continue with rate increases next year.

The Fed's policymakers are scheduled to speak this week and are expected to back the case for a rate hike within months.

"If there was to be a hint coming, it could come on Friday when Janet Yell appears, talks and perhaps may decide to further 'prep' the markets for a rate hike going into next week," INTO Capstone analyst Edward Meier said in a note.

Fed Chair Janet Yell will be at a panel event hosted by Harvard University on Friday.

Goldman Sachs sees a 35-percent chance of a rate hike at the Fed's June 14-15 policy meeting.

Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.38 percent to 872.52 tonnes on Monday.

Meanwhile, spot silver fell 0.5 percent to $16.28 per ounce, while spot platinum rose 0.3 percent to $1,009 an ounce. Spot palladium dropped to its lowest in nearly six weeks at $544.86.

(Additional reporting by Koustav Samanta in Bengaluru; Editing by Ed Davies and Joseph Radford)