Gold Prices Fall as Traders Mull U.S. Monetary Policy

New York (Aug 31)  Gold prices fell on Monday as investors focused on the impact of recent upbeat U.S. economic reports on future monetary policy action from the Federal Reserve.

The most actively traded contract, for December delivery, was recently down $6.10, or 0.5%, at $1,127.90 a troy ounce on the Comex division of the New York Mercantile Exchange.

Gold prices fell 2.2% last week and investors continued to trim holdings of the metal in response to economic data, which showed the U.S. economic recovery is gathering steam. Any sign that growth is improving is likely to make it easier for Fed officials to raise interest rates, a policy shift they've indicated is likely to come before the end of 2015. Gold doesn't pay interest or dividends and is expected to struggle once rates climb.

"The timing is there in terms of the Fed wanting to raise interest rates, the question is will they be able to?" said Ira Epstein, a broker with Linn & Associates in Chicago.

Fed policy makers speaking in Jackson Hole, Wyo., over the weekend gave the impression the central bank would stick to its plan to raise rates before the end of the year despite the recent pronounced swings in global markets.

Investors are also looking ahead to Friday's release of the U.S. employment report, which will give more insight into the U.S. labor market.

"If the data suggests further pressure on average hourly income and increased strength in the labor market, the Fed may have its last window to move, which would have an initial negative impact on gold, but given the China issues, probably a buying opportunity," said Peter Hug, global trading director with Kitco Metals Inc., in a note to clients.

The recent losses close the chapter on gold's August rally, which saw prices run higher during a period of significant global market turbulence as investors sought a haven. The yellow metal had been one of the few bright spots among commodities, which have been hit hard by concerns about the health of the Chinese economy.

The market's gyrations also spurred some investors to believe the Federal Reserve would hold off on raising interest rates in the autumn months. A rate rise would likely lead to a strengthening of the U.S. dollar, hitting dollar-denominated gold prices. Like other commodities, gold tends to fall when the dollar appreciates because it becomes more expensive for foreign buyers.

Physical demand for gold has firmed up since late July with retail investors in the key Indian and Chinese markets increasing their buying. The two countries account for about half of the world's retail demand for the commodity.

"Both gold investments and jewelry buying is seeing some recovery from a low base," said Jammy Chan, head of Greater China for Gold Bullion International, a trading platform that deals mostly with institutional clients.