Gold eased on Monday as losses on the wider financial markets prompted some selling after the metal's biggest one-day price rise in over three years, but it was supported by speculation the Federal Reserve could unveil a new round of monetary easing.
Gold broke ranks with riskier assets on Friday to surge 4.3 percent despite a sell-off elsewhere after a surprisingly weak U.S. payrolls report stoked talk that further stimulus measures may be necessary to reignite growth.
Another round of quantitative easing (QE), which basically translates to printing money, would likely undermine the dollar and confidence in the wider currency markets, benefiting gold.
Friday's data has pushed the (focus) straight back to the Fed, and talk of a possible QE-3 is increasing now, Pradeep Unni, senior analyst at Richcomm Global Services in Dubai, said.
It seems there are limited options with the Fed other than a fund stimulus so that Mr. Obama can show a revival in the economy before he goes for re-election.
Gold is likely to hold above $1,600 in the near term, and any further fresh surprises on the economic front either from the U.S. or European Union are only likely add to the pace of gains, he added.
Spot gold was down 0.2 percent at $1,621.64 an ounce at 7:21 a.m. EDT (1121 GMT), while U.S. gold futures for August delivery were down $1.40 at $1,623.50. Trading is set to be light in Europe, with the London markets closed for a two-day holiday.
Worries over the pace of the U.S. recovery, the euro zone debt crisis and the softer pace of Chinese growth combined to heavily pressure assets seen as higher risk on Monday. Stock markets extended losses in Europe after diving in Asia, with Tokyo stocks hitting a 28-year low. .EU
Other commodities also fell, with oil and Shanghai copper hitting multi-month lows on Monday and some Chinese commodities reaching their downside limits.
The euro held near a two-year low against the dollar and growth-linked currencies fell, with mounting concerns over Spain's banking sector and global economic growth supporting flows into the U.S. currency and the yen.
German Bunds edged off Friday's record high, but remained extremely elevated.
FOCUS SHIFTS TO UNITED STATES
Gold has traded in line with other commodities and against the dollar in recent months, reversing the pattern of much of 2011, but its link with 'riskier' assets is weakening as focus shifts from Europe's debt problems to U.S. growth issues and the prospect of monetary easing.
Extremely low returns on perceived safe havens like U.S. and German bonds are also helping gold.
Up until very recently, lower U.S. bond yields were also accompanied by lower gold prices... primarily because as the euro zone sovereign crisis intensified, capital moved into U.S. Treasuries and other perceived safe government bonds, HSBC said in a note. As the dollar rallied in reaction to capital inflows, gold prices, which are negatively correlated with the U.S. dollar, fell.
Gold prices appear to have very recently broken away from this relationship and have turned higher despite further declines in U.S. Treasury yields, which have reached 60-year lows, it said. Low U.S. and German bond yields leave investors with few quality assets to choose from and may benefit gold.
Among other precious metals, silver was down 0.5 percent at $28.51 an ounce, underperforming gold. Silver prices rallied by the most since February 28 on Friday, up 3.6 percent.
Spot platinum was down 0.5 percent at $1,433.74 an ounce, while spot palladium was up 0.1 percent at $608.75 an ounce. Both platinum group metals underperformed gold and silver on Friday, with platinum rising 2.3 percent and palladium just 0.3 percent.
The gold/platinum ratio, which measures the number of platinum ounces needed to buy an ounce of gold, hit its highest for more than four months on Monday at 1.13, while gold's premium over platinum rose above $190 for the first time since early January.