Gold slides as US dollar, yields rise; palladium hits one-month peak

Gold prices dropped more than 1% on Friday, weighed down by a stronger dollar and higher bond yields after data showed strong U.S. business activity, while auto-catalyst metal palladium jumped to a one-month high.

Spot gold GOLD was down 1.7% at $2,319.95 per ounce as of 01:47 p.m. ET (1747 GMT). U.S. gold futures GOLD settled 1.6% lower to $2,331.20.

"We're likely seeing a reaction to the bump in interest rates this morning and the continued strong dollar that is in the aftermath of the data that came out earlier," said Bart Melek, head of commodity strategies at TD Securities.

U.S. business activity crept up to a 26-month high in June amid a rebound in employment. Data on Thursday showed first-time applications for U.S. unemployment benefits fell moderately last week.

The dollar rose DXY rose 0.2% to its highest level in more than seven weeks, making gold more expensive for other currency holder, while yield on 10-year U.S. Treasury notes US10Y edged higher after U.S. data.

Traders are currently pricing in a 63% chance of Fed rate cut in September, little changed from late Thursday, according to CME FedWatch Tool. Lower interest rates reduce the opportunity cost of holding non-yielding bullion.

Meanwhile, spot palladium XPDUSD1! was up 3.2% at $953.17 per ounce after rising as much as 11.2% to $1,027.04 earlier in the session.

"There has been some significant palladium ETF buying recently which has caused a short-term physical shortage and brought the front of the forwards market into backwardation," said Tai Wong, a New York-based independent metals trader.

"That has created some havoc on the EFP (Exchange of futures for physical) market which is thin to begin with and caused a lot of volatility and short-covering. I expect this volatility to continue for a few more days."

Elsewhere, platinum PL1! was up 1.8% at $995.78 per ounce, while silver XAGUSD1! fell 3.7% to $29.57, but both metals were heading for a weekly gain.