Gold settled about 2 percent lower at a one-month low on Monday as lingering fears that U.S. interest rates could rise in early 2015 prompted bullion investors to cash in gains made during the metal's recent rally to six-month highs.
Other precious metals also broadly fell, with palladium retreating from an earlier 2-1/2 year peak on supply worries due to a combination of a strike in South Africa, simmering tensions over Ukraine and the launch of two palladium-backed exchange-traded funds in Johannesburg.
Analysts said that institutional investors turned bearish on gold after last week Fed Chair Janet Yellen said the central bank will probably end its massive bond-buying program this fall, and could start raising interest rates around six months later.
"It's an extension of people digesting Yellen's comment about the interest rate," said Phillip Streible, senior commodities broker at RJ O'Brien. The lower U.S. stock market also triggered profit-taking across the board.
for April delivery settled 1.9 percent lower at $1,311.20 an ounce. Spot gold fell to its lowest since Feb. 20 at $1,308.50 an ounce in earlier trade and was down 1.8 percent at $1,310 an ounce.
The metal fell 3.5 percent last week, dropping sharply after Federal Reserve Chair Janet Yellen surprised world markets on Wednesday by signalling that U.S. interest rates could rise sooner than had been expected previously.
"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.''
The dollar index was down 0.2 percent on Monday, holding near last week's three-week high, as traders increased bets on a possible U.S. interest rate hike early next year.
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