Gold trades in tight range as US debt deal, Fed hike bets weigh

Gold prices inched lower in thin trading on Monday as the US debt ceiling agreement took worries off the market and weighed on safer assets, while chances of the Federal Reserve raising rates higher dampened the demand for bullion.

Spot gold inched 0.1 per cent lower to $1,945.29 per ounce by 1013 GMT, hovering near two-month lows hit on Friday. US gold futures were also unchanged at $1,944.80.

The pull-back in safe-haven gold came as world stocks rallied on the news of a debt deal being finalised in Washington, although trade was subdued with parts of Europe, including Britain, and the United States on holiday.

"Until a couple of days ago, a majority of investors were betting that the Federal Reserve was remaining steady with rates and not raise them in the coming month," said Carlo Alberto De Casa, external analyst at Kinesis Money.

Last week's economic data changed that view, with the Fed now expected to raise rates in its June 13-14 meeting.

The Fed Fund futures showed a 65.6per cent chance of a 25-basis-point increase, with rates peaking in July at 5.317 per cent.

Gold, which offers no yield of its own, tends to fall out of favour with investors when interest rates rise.

The dollar index was near its two-month peak, weighing on gold prices. A stronger dollar makes the yellow metal more expensive for holders of other currencies.

"As long as we remain above $1,900, I don't see too much risk of further decline… I see a small margin for a decline, which in the worst-case scenario could be $1,800, but no more because the demand is very solid, but we can have temporary correction," De Casa added.

Spot silver fell 0.4 per cent to $23.21 per ounce, platinum gained 0.6 per cent to $1,028.44 while palladium was up 0.3 per cent to $1,427.99.