[LONDON] Gold fell as much as 1.2 per cent on Friday as the dollar rose and markets digested the mixed implications of a European Central Bank plan to pump out about 1 trillion euros to reflate the euro zone's flagging economy.
The metal, often seen as a hedge against inflation, jumped more than 1 per cent above US$1,300 an ounce on Thursday after the ECB announcement.
But with the euro hitting an 11-year low against the dollar, gold prices have since pared some of those gains as investors focused on the impact of the stronger US currency, which makes dollar-denominated assets more expensive for foreign investors.
"Gold was completely dislocated from the dollar yesterday, meaning that euro-gold is the best performing commodity this year, helping dollar gold stay fairly stable around US$1,300," Saxo Bank's Ole Hansen said. "But that strength in the dollar is now proving too much."
Spot gold dropped to a session low of US$1,284.26 an ounce and was down 0.9 per cent at US$1,289.40 by 1536 GMT. Bullion peaked at US$1,306.20 on Thursday, its highest since Aug. 15, and it was still headed for a third straight weekly gain.
US gold futures were down US$11.40 at US$1,289.20 an ounce.
The dollar rose by up to 1.1 per cent against a basket of currencies, mostly due to euro weakness, while European shares had their biggest two-week rally in five years.
Euro-priced gold hit its highest since April 2013 at 1,167.60 euros an ounce.
Spot gold has risen by about 9 per cent since the beginning of the year as political uncertainties in the euro zone and worries about global economic growth lifted investment demand.
Traders are now likely to turn to Sunday's election in Greece and next week's Federal Open Market Committee (FOMC) policy meeting for clues on the wider economic environment and when US interest rates might rise.
The Fed is expected to repeat that global risks have yet to throw the US recovery or its rate-hike plans off track despite the growing number of central banks cutting rates and ramping up stimulus.
"People are coming to the conclusion that while the ECB is getting more expansionary, the Fed may be forced to be less restrictive because of the headwinds to inflation from the drop in oil prices, which can trigger some delay in interest rate hikes and would be positive for gold," Julius Baer analyst Carsten Menke said.
Among other precious metals, spot silver was down 0.8 per cent at US$18.16 an ounce. Palladium lost one per cent to US$763.98 an ounce, while platinum fell 0.5 per cent to US$1,271.50 an ounce.