Gold futures settled lower at $1,277 per ounce as the dollar rebounded and investors booked profits after four days of gains.
The metal pared some losses that were sharper earlier. Bullion had taken a beating after Fed Chairman Ben Bernanke said in May and June that the U.S. economy was recovering strongly enough to slow the pace of the $85 billion of monthly bond purchases.
Signs of some physical supply tightness in gold, as reflected by high premiums and record volume in the Shanghai Futures Exchange and a surge in gold lease rates, helped to limit gold's losses on Friday.
Analysts said, however, rallying U.S. equities amid some positives signs for the economy and no indication of abatementin gold-backed exchange-traded funds outflows could pressure the metal.
"The fact that the leading U.S. equity indices closed at record highs yesterday—which could prompt investors to switch once again from gold ETFs to equities—is problematic for gold," said Eugen Weinberg, head of commodity research at Commerzbank.
"Any prolonged recovery of the gold price is almost inconceivable unless the ETF outflows abate," Weinberg said.
Spot gold was down 0.4 percent at $1,280 an ounce and on track to snap a four-day winning streak.
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U.S. gold futures for August delivery settled $2.30 lower at $1,277.60 an ounce. Gold pared losses after government data showed that U.S. producer prices rose more than expected in June, pointing to increased inflation.
Gold is usually seen as an hedge against inflationary pressures, but stronger inflation could also make the Fed more comfortable about reducing its stimulus.
Holdings of the world's largest gold-backed exchange-traded fund SPDR Gold Trust remained unchanged at 30.2 million ounces, or 4 1/2-year lows, on Thursday. The fund posted the biggest weekly loss of 2.6 percent since the end of April.
The cost of borrowing gold stayed near its highest level since January 2009, reflecting dwindling supplies from bullion banks after heavy liquidation and resilient demand for physical gold products. Trading volumes for gold and silver on the Shanghai Futures Exchange (ShFE) have jumped to record highs a week after the bourse launched after-hours trading, driven by a surge in investment and hedging demand. Also, premiums on Chinese gold and silver products stay sharply higher than in the United States.
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Meanwhile, total U.S. COMEX registered gold stocks fell to a 12-year low of less than 1 million ounces, underlying the tightness of the physical bullion market, said James Steel, HSBC's chief metals analyst.
Spot silver fell 1.4 percent to $20 an ounce, having reached a three-week high of $20.26 on Thursday. Platinum was down 0.1 percent at $1,403 an ounce, after hitting a three-week high of $1,414.75 earlier, while palladium notched up 0.8 percent to $717 an ounce.