After a happy new year, gold headed for its first weekly fall in four weeks as a series of strong US economic data stoked fears the Federal Reserve may continue, or even increase, the pace of scaling back its bullion-friendly monetary stimulus.
Although robust Chinese purchases of the precious metal somewhat supported prices on Friday, which were pressured by a stronger dollar, the metal was poised for a 0.5% drop this week.
Spot gold was marginally down at $1,241.90 an ounce by 6.39 EST while February US gold futures were up by 0.1% at $1241.40 an ounce.
While uncertatities about the tapering earlier last year and the subsequent announcement of the partial rollback of stimulus measures from January 2013 kept investors on edge, muted demand in India, following an official crackdown to trim the trade deficit, took the shine off the precious metal. Although strong purchases by China ahead of the Lunar New Year aided a rally this year, tapering of stimulus and signs that the US economy is witnessing a sustained recovery would wane gold's appeal as a safe-haven asset significantly, especially in times of low inflation there, said analysts.
An end to the Fed's quantitative easing programme hurt gold as the precious metal's rally in recent years was aided by a low interest rate environment, which prompted investors to shift to haven assets such as gold to beat inflationary pressure.
The latest US data revealed that the number of Americans filing new unemployment benefits claims has dropped for a second straight week, reflecting that the sharp fall in job growth last month was perhaps temporary and triggered by extremely cold weather. Another survey on Thursday pointed at a rise in manufacturing activity in the Mid-Atlantic region as well as an increase in factory jobs.
However, Chinese buying in recent weeks ahead of the Lunar New Year holiday on January 31 prevented a sharp fall in gold prices so far.
"However, we expect this to fade in coming weeks as Chinese New Year passes, leading to a short-term pullback in gold prices," ANZ analysts said in a note.