* Dollar index holds near four-week peak * Silver drops to over one-month low (Updates prices) By Sumita Layek March 2 (Reuters) - Gold prices slumped to their lowest in 8-1/2 months on Tuesday, as a stronger dollar and elevated U.S. Treasury yields eroded investor appetite for the non-yielding metal. Spot gold eased 0.4% to $1,716.30 per ounce by 0821 GMT, having dropped to its lowest since June 15 at $1,706.70 earlier in the session. U.S. gold futures slipped 0.3% to $1,717.80. The potential for higher yields is putting pressure on gold, while a stronger dollar is also contributing to its fall, Michael McCarthy, chief market strategist at CMC Markets said, adding that a minor retreat in 10-year yields was "too small to count". Benchmark U.S. Treasury yields have come down from a one-year high hit last week, but continue to remain elevated, while the dollar index held near a four-week peak. Yields are signalling "that by mid-year, inflationary pressures will mean that global central banks would have to tighten their policy, while central banks suggest that will not be the case ... if inflation rises, they'll have very little choice," McCarthy said. While gold is considered a shield against inflation, higher yields have of late threatened that status, since they translate into higher opportunity cost of holding bullion, which pays no return. "At current levels, (gold's) bull run is not over. It is challenged by the changing rates environment," said Nicholas Frappell, global general manager at ABC Bullion, adding that prices could test the $1,670-$1,690 level. Focus also remains on the developments of the $1.9 trillion U.S. coronavirus relief bill that will be debated in the Senate this week. Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust fell to their lowest since May 2020 on Monday. Silver eased 2% to $25.95 an ounce, having earlier slipped to its lowest in more than one month. Palladium ticked 0.2% lower to $2,345.12 while platinum fell 1% to $1,172.85. (Reporting by Sumita Layek in Bengaluru, Editing by Sherry Jacob-Phillips and Ramakrishnan M.)
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