Gold dipped to a 3-1/2-week low on Monday as expectations rose that the U.S. Federal Reserve will hike interest rates as early as June, but prices came off their lows as late-day short-covering entered the market.
Bullion has been under pressure since the Fed last week released the minutes of its April meeting, which showed officials believe the U.S. economy could be ready for another rate increase next month.
Higher interest rates increase the opportunity cost of holding non-yielding bullion.
U.S. rates being kept too low for too long could cause financial instability and stronger market expectations for a rate increase are "probably good," St. Louis Federal Reserve President James Bullard said on Monday.
"The Fed minutes were clearly more hawkish than expected and this has resulted in some change in sentiment and there is now an increased likelihood that they may raise rates in June or July," ABN Amro analyst Georgette Boele said.
Spot gold fell to $1,242.63 an ounce, the lowest since April 28, in earlier trade, and was down 0.24 percent at $1,248.86 an ounce. U.S. gold futures for June delivery settled down 0.1 percent at $1,251.50 an ounce. Shares of gold mining companies also traded near session lows.
"The market has re-priced the chances of a June rate move to 30 percent from 5 percent but the hurdles for a June hike remain substantial and gold has avoided significant technical damage, which has encouraged modest short-covering as well as continued ETF-related buying despite a hawkish lilt in Fed commentary today," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York.
Short-dated U.S. Treasury yields inched up and global stock markets were little changed as investors weighed the possibility that rates could soon rise. The Fed's policymakers are scheduled to speak this week and are expected to back the case for a rate hike within months. Fed Chair Janet Yellen will be at a panel event hosted by Harvard University on Friday.
Holdings in the world's largest gold-backed ETF SPDR Gold Trust rose 1 percent to 869.26 tonnes on Friday, the highest since November 2013.
— CNBC's Gina Francolla contributed to this report.