LONDON: Gold held close to its lowest in two months on Monday, as the dollar marched higher after central bank heads signalled that interest rates were set on a diverging course in the United States, Europe and Japan.
At a gathering of central bankers in Jackson Hole, Wyoming, Federal Reserve Chair Janet Yellen nodded to the concerns of some Fed officials about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.
The heads of the European Central Bank and Bank of Japan pledged more policy stimulus, which weighed on the euro and the yen versus the U.S. currency.
Gold was down 0.2 percent at $1,278.10 an ounce by 1337 GMT. The metal fell 1.8 percent last week, its biggest weekly fall in a month, hurt by strong U.S. economic data and speculation of an early interest rate increase, which sent prices to their lowest in two months at $1,273.06 on Thursday.
U.S. gold futures fell $1.30 at $1,279.70 an ounce. Electronic trading was halted for four hours on Monday due to a technical glitch.
The dollar was up 0.3 percent against a basket of currencies, mostly due to weakness in the euro after ECB President Mario Draghi raised expectations of further policy easing.
A stronger greenback makes dollar-denominated gold more expensive for holders of other currencies.
"It is certainly the dollar that is weighing on the gold price, putting a break on any significant recovery for the time being," Commerzbank analyst Daniel Briesemann said.
The metal, however, held above chart support around $1,270, traders said, as liquidity was drained by the absence of British players on a holiday-lengthened weekend.
"Gold is holding well above support at $1,271 considering the perfect storm of negative gold news last week when we had rising stocks, rising bond yields, strong economic data from the U.S. and a firmer dollar," Saxo Bank senior manager Ole Hansen said.
"Even though the Fed's interest rate tightening is receiving most of the attention, there is a lack of commitment because of poor liquidity at the moment."
The Fed has said it would wait a "considerable time" after winding down a stimulative bond-buying programme in October before raising rates. Financial markets currently expect a rate rise in mid-2015.
Higher interest rates would hurt the attractiveness of non-interest-bearing assets such as gold.
Investment demand for gold was also hampered by stronger global equities.
PHYSICAL BUYING
The fall in bullion prices attracted buying from jewellers in Asia, but the amount was limited and investors stayed on the sidelines, traders said.
Premiums for gold bars in Hong Kong stood at 70 cents to $1.10 to spot London prices, higher than 50 cents to $1.00 quoted late last week because of purchases from jewellers.
July net gold flows into China from Hong Kong dropped to 22.107 tonnes versus 40.543 tonnes in June, their lowest for three years, due to ample supply and as jewellers waited for bargains, data showed on Monday.
Silver fell 0.2 percent to $19.40 an ounce. It hit a two-month low of $19.25 on Thursday.
Spot platinum fell 0.4 percent to $1,412.00 an ounce, having touched its lowest since May 5 at $1,407.30 last week.
Spot palladium was down 0.3 percent at $880.75 an ounce.
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