Gold falls as dollar, bonds emerge as preferred safe haven bets

GOLD - JAKARTA. Gold prices eased to a one-week low on Thursday as investors opted for dollars and U.S. government bonds as a hedge against trade tensions between the United States and China.

Spot gold was down 0.2% at $1,276.72 per ounce by 0954 GMT, after falling to its lowest level since May 23 at $1,274.44.

U.S. gold futures edged 0.4% lower to $1,281.40 an ounce.

"A strong U.S. dollar is weighing on the gold prices. The dollar has been strong lately; it seems like investors prefer to hold U.S. debts and other low risk serving bonds as opposed to gold," SP Angel analyst Sergey Raevskiy said.

"However, gold is still very supported around these prices. You would expect gold to be higher in this environment, but for now, it looks like the investors' focus is elsewhere."

The dollar index climbed to a one-week peak and was hovering within striking distance of a two-year high of 98.371 hit a week ago, as Sino-U.S. trade tensions prompted investors to seek a safe haven in the greenback and government bonds.

The dollar has been used as the preferred hedge from the trade tensions, repeating a trend seen last year and making gold more expensive for holders of other currencies.

The dollar is also benefitting from increased demand for bonds since the currency is needed to buy bonds, eroding bullion's appeal.

Ramping up the rhetoric against the United States, a senior Chinese diplomat on Thursday said deliberately provoking trade disputes is "naked economic terrorism, economic chauvinism, economic bullying."

China's Communist Party newspaper had warned that Beijing was ready to use rare earths to strike back at the United States.

The latest exchanges between Beijing and Washington signalled the heightened risk of a prolonged trade war and have tempered investors' enthusiasm towards riskier assets.

"With bond yields so low and weakening equity markets, gold could find support. As (long) as the price remains above $1,265-$1,270, gold will rally back to $1,306 and $1,316 levels," said Nicholas Frappell, global general manager at ABC Bullion.

Meanwhile, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 0.5% to 740.86 tonnes on Wednesday.

Despite Wednesday's rise, SPDR gold holdings have fallen more than 6% so far this year.

Among other precious metals, silver was steady at $14.42 per ounce. The metal had dropped to $14.25 on Tuesday, its lowest level since early December.

Platinum eased 0.1% to $791.07 per ounce, after earlier falling to its lowest since Feb. 15 at $785.50. Palladium slipped 0.5% to $1,343.40 per ounce.