Gold futures ended slightly lower on Tuesday as U.S. Federal Reserve Chairman Ben Bernanke's strong resolve to battle inflation could prompt bullion investors to take profits in the near term.
In a semiannual report on the economy to the U.S. Congress, Bernanke sought to dispel concerns the U.S. central bank's aggressive monetary easing could end up fueling inflation, saying he was confident the Fed could pull back its extraordinary stimulus when the time was right.
Bernanke's comments may have allayed some issues on inflation, reassuring the market and investors that the Fed would be vigilant, said James Steel, chief commodities analyst at HSBC in New York.
That might have helped put pressure on the gold today and might have helped cap rally that we have seen earlier this week, he said.
In June, gold rose toward the $1,000 per ounce level on heightened worries about potential inflation after central banks around the world pumped massive liquidity to battle one of the worst economic crises since the Great Depression.
However, the metal has been weighed down by the prospect of deflation, or a downward spiral in prices, amid an uncertain economic recovery.
U.S. August futures settled down $1.90 at $946.90 an ounce on the COMEX division of the New York Mercantile Exchange.
Spot gold was at $947.70 an ounce at 3:25 p.m. EDT (1925 GMT), against $948.35 in its previous session finish.
Bernanke also said that the outlook for the long-suffering U.S. economy was improving, but supportive policies would be needed for some time to prevent rising unemployment from undercutting recovery.
On Monday, gold prices rallied above $950 an ounce to the highest level in more than a month a sharp dollar decline boosted bullion's appeal as a hedge against the U.S. currency.
The dollar pared losses against the euro after Bernanke, in his testimony to the House of Representatives, said job losses remain high and the Fed's accommodative monetary policy could stay for an extended period.
The most noticeable change for gold has been the stronger correlation with the dollar, said Standard Chartered analyst Daniel Smith. We went through a stage when the correlation was negative and now it's pretty strongly positive.
The testimony curbed risk appetite, diverting interest from currencies seen as higher risk. Gold is often bought as an alternative asset to the dollar and tends to move in the opposite direction to the U.S. currency.
However, other analysts still expect inflation to be the next major driver to back gold's rally.
French bank Calyon (CAGR.PA) forecast gold prices to average $935 an ounce this year, rising to $975 in 2010 and $1,025 in 2011, with the price rise driven by dollar weakness and sharp gains in inflation.
The two primary drivers we see pushing gold higher are a weaker dollar... and massive injections by central banks of liquidity to support economic growth, said Calyon metals analyst Robin Bhar.
This unconventional monetary policy is inflationary.
With physical demand for gold from both jewelers and investors still sluggish over the seasonally weak summer months, traders awaited fresh direction from the currency markets.
Silver was at $13.54 an ounce, platinum was at $1,168.50 an ounce against $1,180, and palladium was at $254 an ounce from $252.
In mining news, South African gold producers raised their pay offer for miners, averting a possible strike for now, the mineworkers unions said. Talks will resume on July 28.