Gold fell on Tuesday, as the dollar rebounded following upbeat US housing data that supported views of a looming interest rate increase by the Federal Reserve. US housing starts rose to a near eight-year high in July as builders ramped up construction of single-family homes, the latest indication of an improving economy. Spot gold snapped initial gains and was down 0.5 percent at $1,111.71 an ounce by 1419 GMT, while US gold for December delivery fell 0.7 percent to $1,110.20 an ounce.
Spot silver was the worst-performing precious metal, dropping 3.7 percent to a 10-day low of $14.70 an ounce, also pressured by a six-year low in copper prices. "It looks like in the very short term the data this afternoon has been reasonably positive, so the dollar has appreciated on the back of that and gold is on a downtrend," Mitsubishi Corp strategist Jonathan Butler said.
The dollar traded up 0.1 percent against a basket of leading currencies, while European shares were mixed and US stocks opened lower, following a 6 percent slump in Chinese markets. Solid jobs growth, rebounding retail sales and a housing sector on the mend suggest the Federal Reserve could be on track to raise interest rates this year, perhaps at its next policy meeting in September.
Higher interest rates would put non-yield-bearing gold under further pressure, increasing the opportunity cost of holding the metal. "Despite the recent market volatility caused by the RMB (yuan) devaluation last week, (we) believe that the Fed will look past international macro developments, focusing instead on positive trends in US labor data, and therefore continue to see September Fed lift-off as the most likely scenario," Citi said in a note.
There should be more clues on the Fed's thinking regarding interest rates when the minutes of the US central bank's July 28-29 meeting are released on Wednesday. Gold had snapped a seven-week losing streak and scaled a three-week high of $1,126.31 last week after China's devaluation of its yuan fuelled some speculation that the Fed could hold off on raising rates this year. "September, when we expect the first US rate hike, is going to be crucial for the precious metal's medium-term direction," ABN Amro analyst Georgette Boele said. Investors withdrew $2.3 billion from gold exchange-traded products in July as the dollar strengthened, BlackRock data showed. Platinum fell 1.3 percent to $980.75 and palladium slipped 2.8 percent to $594.97.