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Gold falls on strong dollar and higher U.S. yields

By Zandi Shabalala
Gold bars and Swiss Franc banknotes are seen in this illustration picture taken at the GSA in Vienna November 13, 2014. REUTERS/Leonhard Foeger

By Zandi Shabalala

LONDON (Reuters) - Gold slumped to a five-week low on Wednesday as the dollar and U.S. Treasury yields jumped on robust U.S. data and signs of an easing in the U.S.-China trade conflict.

The benchmark U.S 10-year Treasury yields rose to 3 percent for the first time in more than four years, reflecting the durability of the U.S. economic expansion after U.S. consumer confidence rebounded in April and new home sales increased more than expected in March.

But higher yields on bonds make gold a less attractive investment because it pays no interest.

Meanwhile, there was a decline in political risk after the United States said it would likely reach a trade agreement with China and that officials from both sides would sit down for negotiations in a few days.

"Recently there has been some optimism that the U.S-China trade war isn’t going to be as big of an issue," said Natixis precious metals analyst Bernard Dahdah.

"There is a bit more confidence in the U.S. and that negatively affects gold, naturally, in terms of geopolitics."

Spot gold was down 0.7 percent at $1,320.56 per ounce, as of 1422 GMT. It touched a session low of $1,318.51, the worst since March 21.

U.S. gold futures dropped 0.8 percent to $1,321.50 per ounce.

The dollar index, which measures the greenback against a basket of currencies, rose to a four-month high, up 0.4 percent.

World stocks were down for the fifth straight session on Wednesday.

In other geopolitical news, North Korean leader Kim Jong Un is due to hold a summit with South Korean President Moon Jae-In on Friday, and is expected to meet Trump in late May or early June.

"As traders put geopolitical and trade risk in the rear-view mirror for the time being, how the dollar flourishes and wilts will be the primary driver of near-term gold sentiment," said Stephen Innes, APAC trading head, OANDA.

Gold is often seen as an alternative investment during times of political and financial uncertainty.

But investor appetite has been climbing as holdings in gold exchange-traded funds (ETFs) rose to the highest since 2013.

"As the Goldilocks market environment draws to a close, investor interest in gold has picked up," said TS Lombard in a note, referring to an economy that is not so hot that it causes inflation, and not so cold that it causes a recession.

In other precious metals, spot silver dropped 1 percent to $16.54 an ounce, and platinum eased 1.2 percent to $915 an ounce, having touched its lowest in over two weeks.

Palladium fell for a third straight session, down 0.5 percent at $969.40 an ounce.

(Additional reporting by Swati Verma in Bengaluru; Editing by Alexandra Hudson and Adrian Croft)