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," %VIRTUAL-article-sponsoredlinks%Heraeus trader Alexander Zumpfe said.
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.
Gold Plunges: 5 Ways to Buy It At a Bargain
Gold Tumbles to 1-Month Low on U.S. Rate Hike Fears
What's involved: You can buy gold bars or coins from coin dealers across the country. Many coin dealers have online businesses that will ship gold directly to your home.
Pros: You have the gold in your possession, avoiding any risk of third-party misconduct that other methods of investing in gold entail. Some investors enjoy the coin-collecting aspect of gold bullion coins.
Cons: You'll pay a markup to the current spot price to buy physical gold and might have to accept a discount when you sell it back. Also, you have to find and pay for a safe place to store your gold.
What's involved: Some coin dealers offer pool accounts, which allow you to buy gold but arrange to have it stored with the dealer rather than taking delivery. At any time, you then have the option either to sell the gold back or arrange to have the dealer send you a physical coin or bar corresponding to your pool-account position.
Pros: You have all the benefits of owning gold, but the dealer remains responsible for its care. You avoid dealing with shipping and insurance costs and have the assurance that it's held in a secure facility. The premiums for buying and discounts for selling also tend to be smaller than with physical gold.
Cons: To take possession of the gold, you'll have to pay shipping costs and other fees. You also have to trust that the dealer running the pool account will take all necessary steps to protect it from theft or other dangers.
What's involved: Gold futures contracts allow you to buy the right to take delivery of gold at a specified future date. Futures contracts tend to track the changing spot price of gold, paying you profits when prices rise and losing money when they fall. Most futures investors sell back the contract before it expires, never taking delivery of the physical gold underlying the contract.
Pros: You get the potential financial benefits of owning gold without worrying about storing it. You also don't have to come up with the full value of the underlying gold, as futures contracts require only a small margin balance covering a fraction of the gold's total value.
Cons: Futures contracts are only available through specialized brokerage accounts, and there are commissions involved. Most futures contracts may provide too much exposure, as a standard contract corresponds to 100 ounces, worth about $140,000 at current prices. You may have that much in your portfolio to invest, but putting it all into gold futures could give you too much exposure to one commodity.
What's involved: Exchange-traded funds like SPDR Gold (GLD) own vast holdings of gold bullion. Each share of SPDR Gold has a value of just under a tenth of an ounce of gold, and those shares rise and fall with the price of gold bullion.
Pros: Gold ETFs take responsibility for storage and protection of the gold in their possession, saving you the hassle and cost of owning physical gold.
Cons: Although many gold ETFs own physical gold, some gold ETFs use derivatives rather than bullion to track changing gold prices. For those ETFs, you run the risk that the derivatives involved won't move in lockstep with gold prices, potentially causing you to miss out on a gold-price increase.
What's involved: Hundreds of public companies mine gold. When gold prices rise, they earn more for the gold they produce, tying their value to that of the yellow metal itself.
Pros: Unlike other investments, mining stocks can actually produce income. Some miners even pay dividends to shareholders.
Cons: Mining stocks don't always track the price of gold, as other factors such as labor disputes and production costs can cause miners to suffer financial difficulties even when gold prices are high. Lately, gold-mining stocks have had far worse returns than bullion due to rising costs and falling profit margins.
Each of these five ways to add gold to your portfolio has pros and cons. But if you see the value of having gold among your investments, they're all worth considering to give you the gold exposure you want.