GOLD PRICES traded in a narrow range Monday morning in London, largely unchanged from last week's finish at $1252 against the rising US Dollar before slipping close to the 3-week low of $1244 touched after the release of the Fed's April meeting minutes last Wednesday, writes Steffen Grosshauser at BullionVault.
The US Dollar index remained above 95 against a basket of other major currencies, having reached a 7-week high following the Fed minutes, which raised expectations of a June rate hike.
New York Federal Reserve president William Dudley separately said last week that the US economy could be strong enough for another rate hike in June or July.
Interest-rate futures currently see the probability of a June rate hike at 26%, according to the CME Group's FedWatch tool.
"We see gold continuing to work lower over the course of the coming week, as an upward trending Dollar should continue to weigh in on prices," said INTL FCStone analyst Edward Meir after the Dollar saw its third straight week of gains.
"Leading into June, gold will be at the mercy of US dollar flows and market positioning, with key support levels for the metal [at] $1243 and below this, $1205," added Swiss refining and finance group MKS.
However, "a premature hike by the Federal Reserve may lead to a slide in inflation, a pullback in growth and greater volatility, causing investors to shun risky assets," points out Gary Dugan, chief investment officer for wealth management at Emirates NBD.
A loss of trust in the greenback, says Dugan, may lead to a bigger demand among investors in alternative assets like gold, which he sees at $1400 an ounce in the near term and around $1800 by the end of next year.
Even if the Fed hikes rates twice more this year, that won't necessarily stop gold's 2016 rally, reckons Julian Jessop, chief international economist at UK consultancy Capital Economics.
"The conventional wisdom, of course, is that Fed tightening is bad for gold, mainly because higher US rates can strengthen the Dollar and increase the opportunity cost of holding commodities," he explains.
"However...gold and silver prices actually rallied in the weeks and months after the Fed first raised rates last December."
Billionaire hedge fund manager George Soros revealed last week that he recently made an investment of nearly $390 million in total between Canadian miner Barrick Gold (NYSE:ABX) and the giant gold-backed ETF SPDR Gold Trust (NYSEArca:GLD), while significantly cutting down his existing stock portfolio.
Total holdings in the GLD increased 1% to need 869 tonnes of backing on Friday, the highest level since November 2013.
Silver, in the meantime, dropped 1% to $16.37 per ounce Monday, and other precious metals also edged lower with platinum down 0.4% and palladium down 0.9%.
European stocks fell from a three-week high as Brent crude oil slips 1% to around $48 a barrel, indicating that after the recent rally towards $50 the demand may already be fading again.