Gold fell below $1,200 for the first time since mid-February on Monday, as comments from Federal Reserve Chief Janet Yellen on the likelihood of higher U.S. interest rates sent the dollar to two-month highs.
The Fed should increase interest rates in the coming months if the economy picks up, Yellen said on Friday, bolstering the case for a rate hike in June or July. St. Louis Fed President James Bullard said on Monday global markets appeared to be "well-prepared" for a summer rate hike.
An increase in U.S. rates would raise the opportunity cost of holding gold, which does not earn interest. It would also bolster the dollar, making gold more expensive for holders of other currencies. Longer term, however, negative interest rates should boost gold, said John Ciampaglia, executive vice-president of corporate development for Sprott.
Minneapolis Federal Reserve Bank President Neel Kashkari said last week that negative interest rates, used by central banks in Europe and Japan to stimulate their economies, would only be a last resort for the U.S. central bank. "The world in general is not accustomed to this era of negative interest rates and in that environment, I think gold provides an alternative form of currency," Ciampaglia said.
Gold fell as much as 1 percent to $1,199.60 an ounce, its lowest since Feb. 17, and was down 0.6 percent at $1,205.20 an ounce. The metal was on track for nine sessions of losses, its longest losing streak since March 2015.
U.S. gold futures dropped 0.8 percent to $1,207.4. Trade was thin with public holidays in Britain and the United States on Monday.
"The (next technical) support is at $1,185 and a break of this level will open the floor towards the $1,160 mark," said Naeem Aslam, chief market analyst at Think Forex UK. "Money managers are reducing their bullish bets and ... hedge funds are strongly bullish on the dollar."
Hedge funds and money managers cut their bullish bets in U.S. gold futures and options to their lowest in almost two months, U.S. government data released late on Friday showed.
Positions were reduced on a similarly radical scale in early November 2015 when the Fed prepared the market for a rate hike in December, Commerzbank analysts said. "At that time the gold price dropped from $1,200 to $1,050 Gold's losses were also due to higher global shares, which showed increased risk appetite among investors.
Bullion, which had risen 16 percent in the first quarter, has been under pressure since the prospect of an imminent rate hike was indicated by the Fed's April meeting minutes, which were released earlier this month. Key central bank officials have consistently supported an increase.
Investors are awaiting U.S. non-farm payrolls data for May, due on Friday. A solid reading could heighten expectations for a June rate rise.
Among other precious metals, spot silver lost 1.6 percent and touched a seven-week low of $15.86 per ounce. Spot platinum fell to its lowest since April 8 at $961, before slightly recovering and palladium gained 0.6 percent at $539.73 an ounce.