Gold eases after two-day rally ahead of holiday

NEW YORK/LONDON (Reuters) - Gold eased on Tuesday after a two-day rally, shrugging off the weak dollar and rebound in oil prices as dealers squared their books ahead of year-end amid typically light trade leading up to the Christmas holiday.

A woman holds a one-kilogram gold bar at the headquarters of the Australian Bullion Company (ABC) in Sydney April 19, 2013. REUTERS/Daniel Munoz

The metal is up 2.5 percent from last week’s trough, which was near the lowest level since early 2010, reached after the Federal Reserve announced its first rate rise in nearly a decade, raising uncertainty over the pace of further increases.

“Most of the things today would’ve made you think the gold market would be stable or going up. It’s behaving in a contrary, slightly erratic fashion,” said James Steel, chief metals analyst for HSBC Securities, noting that pre-holiday trade is typically erratic at this time of year.

“I think it’s just book squaring.”

Spot gold was down 0.5 percent at $1,072.20 an ounce at 3:17 p.m. EST (2017 GMT), while U.S. gold futures GCG6 for February delivery settled down 0.6 percent at $1,074.10.

“Going into next year, there’s probably a bit of downside risk because investors are not yet focusing on the potential for interest rates to remain stable,” ETF Securities analyst Martin Arnold said.

Rising interest rates boost the opportunity cost of holding non-yielding gold, while lifting the dollar, in which it is priced.

Hedge funds held a record short position going into last week’s Fed hike and have been reducing their negative exposure in recent days, Saxo Bank said in a note.

“When you get close to the end of the year, liquidity is getting smaller and people start closing the trades they have had for the year,” ABN Amro analyst Georgette Boele said. “One of them was short euro, long dollar, short gold.”

“We probably didn’t get as low as some people may have wanted, so they’re closing (their trades) and they’ll try again next year,” she said.

Wall Street climbed while the dollar slipped against a basket of currencies as traders took profits on bullish greenback bets following the Fed’s rate hike and a steep drop in existing home sales in November. [MKTS/GLOB][USD/]

The Fed has linked the pace of future rate rises to the strength of U.S. data.

While gold drew support from a big rise in holdings of the top gold exchange-traded fund (ETF) late last week, a resumption in outflows this week indicated that investors remain cautious. [GOL/ETF]

Silver fell 0.1 percent at $14.26 an ounce, while platinum was down 0.3 percent at $870.64 and palladium gained 0.6 percent to $552.31.

Additional reporting by Clara Denina in London and A. Ananthalakshmi in Singapore; Editing by David Goodman, David Evans and Alistair Bell