Commodity slips on strong US econ data, Fed rate hike expectations

May 18, 2016 6:22 AM

"Officials have been saying they wish to raise the rates but unless and until Fed Chair Janet Yellen mentions something I don't think the market will actually take that into consideration," he added.

Gold bullion is displayed at Hatton Garden Metals precious metal dealers in London, Britain July 21, 2015.

Gold dropped on Wednesday after strong U.S. economic data and comments from the central bank officials bolstered expectations that the Federal Reserve could soon hike interest rates.

A Fed policymaker said on Tuesday he will push for an interest rate hike in June or July, and two others predict upto three rate increases this year.

Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-interest yielding bullion.

Spot gold dipped 0.5 percent to $1,273.20 per ounce at 0640 GMT, after gaining 0.5 percent in the previous session. U.S. gold futures fell 0.2 percent to $1,275.

"The prices have slipped slightly today... that is partly due to speculation or increased bets that the Fed will be listing higher rates this year," said Vyanne Lai, analyst, National Australia Bank.

Bullion has rallied 20 percent this year on speculation that the Fed has slowed down its expected pace of rate increases on concerns about global economic growth and the volatility of stock markets.

In its April policy statement, the Fed indicated it wants to have more confidence in the economy's overall health before hiking rates again.

U.S. data on Tuesday showed that consumer prices recorded their biggest increase in more than three years in April. Housing starts and industrial production rebounded strongly last month, suggesting the economy was regaining steam early in the second quarter after almost stalling early in the year.

Strong economic data could prompt the Fed to raise rates sooner than later.

Traders will be eyeing the Fed's April meeting minutes which is due later in the day for further cues on U.S. interest rate outlook.

"I think a lot of investors are holding back as they are waiting for the FOMC minutes," said Brian Lan, managing director at Singapore-based gold dealer GoldSilver Central.

Dollar strength also weighed on gold and other precious metals on Wednesday. The dollar index, which measures the greenback against six major currencies, rose 0.3 percent. [USD/]

Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.56 percent to 855.89 tonnes on Tuesday, the highest since November 2013. [GOL/ETF]

Spot silver slipped 0.9 percent to $17.07 per ounce, spot platinum dropped 0.5 percent at $1,043.95 per ounce and spot palladium fell 0.2 percent to touch $581.20 an ounce.