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

NEW YORK/LONDON (Reuters) - Gold slumped to a five-week low on Wednesday as the dollar jumped and U.S. Treasury yields continued to rise on signs of U.S. economic strength and an easing in the U.S.-China trade conflict.

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

The benchmark U.S. 10-year Treasury yield breached 3 percent on Tuesday for the first time in more than four years and remained above that level on Wednesday as jitters about growing federal borrowing spurred selling of U.S. government bonds.

Higher yields on bonds make gold a less attractive investment because it pays no interest. [US/]

“On a technical level, people have been watching it for a long time. Yields have been trending lower for multiple decades really, so some have argued in the marketplace that we are right up on the cusp of a regime shift,” said TD Securities commodities strategist Daniel Ghali.

Spot gold XAU= was down 0.66 percent at $1,321.56 per ounce by 1:56 p.m. EDT (1756 GMT). It touched a session low of $1,318.51, the lowest level since March 21.

U.S. gold futures GCcv1 for June delivery settled down $10.20, or 0.8 percent, at $1,322.80 per ounce.

The dollar index .DXY rose to a four-month high against a basket of currencies. [USD/]

World stocks were down for a fifth straight session on Wednesday. [MKTS/GLOB]

Meanwhile, political risk declined 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.

“There is a bit more confidence in the U.S. and that negatively affects gold,” said Natixis precious metals analyst Bernard Dahdah.

Gold is often seen as a store of value during times of political and financial uncertainty.

“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 at OANDA.

But investor appetite climbed as gold-backed exchange-traded funds (ETFs) holdings rose to the highest level since 2013. [0#ETFHLD=XAU]

“As the Goldilocks market environment draws to a close, investor interest in gold has picked up,” TS Lombard said 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.

Meanwhile, spot silver XAG= dropped 0.9 percent to $16.56 an ounce after touching $16.49, near a two-week low. Platinum XPT= lost 1.7 percent to $910.20 an ounce after earlier hitting $903.50, near a three-week low.

Palladium XPD= fell 0.22 percent to $972.4 an ounce after touching $956.10 earlier, a two-week low.

Additional reporting by Swati Verma in Bengaluru; Editing by Adrian Croft and Paul Simao