LONDON -- Gold prices tumbled to a one-month low Monday as expectations that U.S. interest rates could rise in early 2015 supported the dollar and prompted investors to cash in gains made during the metal's recent rally to six-month highs.
Palladium prices hit a 2½ year peak as a strike in South Africa, simmering tensions over Ukraine and the launch of two palladium-backed exchange-traded funds in Johannesburg fueled concerns that demand could outpace supply.
Spot gold fell as much as 1.8 percent to its lowest since Feb. 20 at $1,310.14 an ounce, and was down 1.7 percent at $1,311.35 an ounce at 1508 GMT (11:08 a.m. Eastern time). U.S. gold futures for April delivery were down $23.70 an ounce at $1,312.30.
The metal fell 3.5 percent last week, dropping sharply after Federal Reserve Chair Janet Yellen surprised world markets Wednesday by signaling that U.S. interest rates could rise sooner than had been expected previously.
"It's the higher U.S. interest rate story and the accordingly stronger U.S. dollar that are weighing on gold,"
The dollar index was up 0.2 percent Monday, holding near last week's three-week high, as traders increased bets on a possible U.S. interest rate hike early next year.
Traders said further gains for the dollar now depended on the strength of economic data, with any acceleration in the U.S. recovery likely to bolster expectations of an earlier normalization of Fed policy.
"Gold started dropping once the Fed came out with the rate news," Natixis analyst Bernard Dahdah said. "We saw increasing strength in the dollar, and 10-year U.S. yields increased quite sharply.
"With higher yields you get a higher opportunity cost of holding gold, and with the stronger U.S. dollar there is less of a fear of currency debasement," he said. "We could see gold dropping below $1,300 in the next month if we get the necessary U.S. data, a strengthening dollar and higher yields."
A lack of activity in the physical sector in Asia added to pressure on gold, with demand from top consumer China likely to be subdued because of a weak yuan, which hit a 13-month low last week, and the discounted prices on the Shanghai Gold Exchange.
Data from the Commodity Futures Trading Commission on Friday showed hedge funds and money managers raised their bullish bets in gold futures and options to the highest since December 2012.
"[Gold's drop] is due no doubt to further profit-taking after net long positions in gold were increased for the sixth week running in the week to 18 March," Commerzbank said in a note Monday.
"At 121,100 contracts, they are currently at their highest level since the end of November 2012. Meanwhile, the net long positions have probably been reduced in part."
Spot palladium hit its highest since August 2011 at $799.50 an ounce. The auto catalyst metal was later down 0.2 percent at $787.50 an ounce, as weakness in gold dragged down the precious metals complex.
Spot platinum was down 0.3 percent at $1,426.99 an ounce, while spot silver was down 1.3 percent at $20 an ounce.
-Additional reporting by Lewa Pardomuan in Singapore.