Gold settled higher on Monday, with markets expecting the Federal Reserve to begin tapering its commodity-boosting monetary stimulus as soon as this month despite the withdrawal of Lawrence Summers from the race to head the U.S. central bank.
Spot gold fell by as much as 1.4 percent to a session low of $1,307.60 an ounce earlier and was last trading at $1,315, down 0.9 percent. It posted its steepest weekly drop in more than two months last week, falling by 4.6 percent, while U.S. gold futures for December delivery settled $9.20 higher at $1,317.80.
The consensus is that the Fed will initially reduce its bond purchases, now $85 billion a month, by $10 billion and will announce the reduction to its quantitative easing after its Sept. 17-18 meeting.
The withdrawal of former U.S. Treasury Secretary Summers from the Fed race could suggest a more gradual approach to tightening monetary policy, with potential front-runner Janet Yellen perceived as a more dovish contender.
The news sent the dollar to a near-four-week low against a basket of currencies, U.S. Treasury yields to a one-month lows and European shares to five-year highs but it had limited impact on gold, which rose nearly $10 an ounce before giving up gains.
"The prospect that the Fed's tone will remain dovish is good for equities but not for gold at the moment, as you would need a combination of yields dropping and inflation expectations moving up to really see gold stronger," Credit Suisse analyst Karim Cherif said.
Gold and equities have both been boosted by quantitative easing programs, as these increased financial market liquidity. Bullion prices have lost 19 percent this year after the Fed signaled it would start reining QE.
"Although the Fed will do anything to minimize the impact, it will have to start tapering this month otherwise it will be in for a lot of criticism," Societe Generale analyst Robin Bhar said.