Gold fell 1 percent on Thursday after the minutes of the Federal Reserve's most recent meeting gave no indication that U.S. policymakers were gearing up for additional action to stimulate growth, lessening the chances of a boost for the bullion price.
Wednesday's minutes showed the Fed was open to buying more Treasury bonds to stimulate the economy but that the recovery might need to weaken for a consensus to build.
Spot gold was down 1.3 percent at $1,556.06 an ounce at 1414 GMT. The price has fallen by 1.6 percent so far this week, marking its second consecutive weekly decline.
Disappointment that the minutes did not point to greater appetite for QE, coupled with data showing the number of Americans filing new claims for unemployment benefits fell to the lowest in four years, lifted the dollar to two-year highs against the euro.
The correlation between gold and the dollar index was around its most negative in two years.
Most of the price movements recently in gold have been driven by movements in the foreign exchange markets and by macroeconomic issues in general rather than anything too specifically gold-related, Mitsui Precious Metals strategist David Jollie said.
At the start of June, enhanced perceptions that QE3 might be launched drove the price up quickly. Near the end of June, lukewarm comments by the FOMC suggested QE3 was further away than some had thought and the price fell back.
While the prospects of QE3 taking place on some timescale are still reasonable, this is likely to remain the primary focus of the gold market, he added.
The prospect of no immediate Fed policy response delivers gold a twin blow: first from the ensuing strength of the dollar, which boasts more yield-appeal for investors when rates are not expected to fall further, and second from the lower chance of the extra liquidity that tends to favor gold.
The gold price has more than doubled in value since the Fed initiated its multi-trillion dollar bond-buying program, a tool known as quantitative easing, in late 2008 during the depths of the global financial crisis.
The market can pretend that QE3 isn't important, but it is one of the fundamental factors that is supporting gold prices, Natixis head commodities analyst Nic Brown said.
It is a case that any hints, any clues that are coming out of the Fed over when they might do it, whether they might do it are absolutely central to gold prices. There have been a few comments by FOMC members suggesting they are more prepared for QE, but the Fed minutes we got last night gave a much more balanced, more neutral view of things.
Gold has fallen in six out of the last 10 trading sessions, compared with seven daily declines in global equities. .MIWD00000PUS
STUCK IN A RUT
In the last 10 weeks, the gold price has struggled to break free of a $1,630-1,550 range and this week has traded in its narrowest band since late April, with less than $40 between intraday highs and lows, compared with a weekly average of nearly $84 so far this year.
The options market suggested that investors were betting on a recovery in the price of the metal this month.
The largest change in open interest over the past week surfaced in $1,600 calls, options that give the holder the right but not the obligation to sell gold futures at this price by expiry on July 26.
Open interest in these options has risen by 977,000 ounces, effectively trebling and bringing combined call and put open interest at this strike price to 12,999,000 ounces and making this the largest at-the-money option.
A rise in open interest in calls above the underlying futures price suggests in theory that investors are betting on a price increase over the coming couple of weeks.
Open interest in at-the-money puts, which give the holder the right to sell gold futures at a set price, have only increased marginally. The single largest put is $1,550, but open interest has only risen by 190,000 ounces, or 2.2 percent.
In other precious metals, silver fell 1.5 percent to $26.67 an ounce. The silver price was set for a fifth consecutive monthly decline, its worst run in 12 years. In this time, silver has lost a quarter of its value.
Platinum fell by 1.4 percent on the day to $1,403.75 an ounce, bringing its discount to the gold price to $160, its largest in three weeks. Palladium was down 1.2 percent at $570.75 an ounce.