GOLD prices slipped below $1,650 an ounce on Monday as stock markets retreated and the dollar firmed, but remained in a narrow range as investors focused on the outlook for US budget talks and the Federal Reserve’s quantitative easing programme.
Fed officials are increasingly concerned about the potential risks of the US central bank’s asset purchases on financial markets.
Quantitative easing, which benefits gold by maintaining pressure on long-term interest rates and stoking inflation fears, has been a major driver of higher prices in recent years.
Any change in policy would likely weigh heavily on gold.
"The current discussion in the gold market is when the Fed would end quantitative easing," said Peter Fertig, analyst with Quantitative Commodity Research.
"This has reversed the recovery in gold which we saw when the fiscal cliff was avoided," Mr Fertig said, referring to the agreement reached by the US Congress and President Barack Obama at the end of 2012 to avert a fiscal crisis.
Spot gold was down 0.6% at $1,645.91 an ounce at 1.45pm, GMT, while US gold was down 0.2% at $1,646.30.
Spot prices slid to their lowest since late August on Friday after minutes from the Fed’s December policy meeting showed that several top officials expected to slow or stop its latest QE programme "well before" the end of the year.
They later rebounded after data showed the US unemployment rate stayed stubbornly high last month, to end the week little changed. Gold retreated again on Monday as some investors booked profits in equities and commodities after last week’s gains.
Investors cashed in gains in world stocks and crude oil, but signs of a brightening global economic growth outlook limited the falls.
Despite a slight increase in the unemployment rate, Friday’s US jobs data showed employers kept up a steady pace of hiring in December and its vast services sector was expanding at a brisk rate, while manufacturing surveys last week pointed to a pick-up in China.
Analysts who study past price patterns for clues on the future direction of trade flag up support for gold at $1,625 an ounce, last week’s four-and-a-half-month low.
Barclays Capital also identified resistance at $1,665.
Commerzbank said it expects support at $1,629 to underpin gold, a close below which would "leave psychological support at $1,600 exposed".
It said gold’s spike higher from last week’s low "suggests a reluctance to break down quite yet — however, downside risks are growing".
Weaker gold prices at the beginning of 2013 sparked buying in Asia’s physical bullion market as customers prepared for upcoming Lunar New Year holiday demand.
"Gold prices have gone down a lot since December and we are seeing very good physical demand from India, China and Southeast Asia," one Singapore-based trader said.
Hedge funds and money managers increased the size of their net longs in gold futures and options in the week to Dec. 31, ending two weeks of declines, Commodity Futures Trading Commission data showed on Friday.
Elsewhere, sales of US American Eagle gold coins in 2012 were the weakest in five years despite a strong finish, hurt by declining price volatility, dealers said.
Among other precious metals, silver was down 0.9% to $29.95 an ounce. Platinum was down 0.2% at $1,549.24 an ounce and palladium was down 1.1% at $675 an ounce.