Gold steadied around five-month highs on Monday, drawing strength from last week's indication by the head of the U.S. Federal Reserve that the central bank could act to shore up growth and by evidence of a strong pick-up in investor demand.
The gold price rose for a third successive month in August, with a gain of 4.8 per cent, the largest one-month increase in price since January, lifted in large part by expectation for the Fed to signal that it could initiate another multi-trillion-dollar program of bond buying to keep interest rates low.
Gold has doubled in price since the Fed first employed quantitative easing, the practice of buying government debt on the secondary markets to keep rates low and liquidity high, in late 2008 and has spent more than $3-trillion in doing so since.
An environment of low real interest rates, which strip out the effects of inflation, makes gold more appealing to investors who may find they lose out as returns from yield- or dividend-bearing assets such as bonds or stocks can diminish.
Holdings of gold in exchange-traded funds hit a record high by Friday, while U.S. exchange data showed speculative holdings of gold futures witnessed their largest weekly increase last week since the start of the year.
Fed Chairman Ben Bernanke, speaking at an annual central bank conference in the mountain resort of Jackson Hole last week, left the door open to a further easing of monetary policy but gave few hints on any imminent action.
Spot gold was flat at $1,690.80 an ounce, having touched a five-month high of $1,692.71 on Friday, when it rose 2.1 per cent in its largest one-day rally since late June.
U.S. gold futures for December delivery were up 0.3 per cent at $1,692.80 an ounce. The U.S. market was closed on Monday for a public holiday.
"Gold has really got to have full-blown (quantitative easing) to really trigger a rally ... that would be the start of the big push through $1,700 ... but where it goes from there is a bit more difficult," Societe Generale analyst Robin Bhar said.
"It is difficult to see gold at multi-year highs. I can see it supported by currency debasement around the world, but it's difficult to see it going to say $3,000 or $4,000 in the absence of any other catalyst," he said, adding that he expected gold to eventually find a ceiling at around $1,800 an ounce.
The dollar price of gold is still 12 per cent below last September's record at $1,920.30, while gold in euros is just 2 per cent below its record 1,373.92 euros an ounce struck 11 months ago, due to the drag on the single European currency from the European debt crisis.
Mr. Bernanke said the stagnation in the U.S. job market was a "grave concern." He said the Fed had to weigh the costs as well as the benefits of more monetary stimulus, although he hinted the costs were likely worthwhile.
"This has basically been taken to mean that QE3 is a case of when and not if," David Govett, head of precious metals at Marex Spectron said.
"However, gold and silver outperformed the currencies and the stock markets and as I say, this more than the speech tells me that from now on, this is a dip buying market. Yes, there will be setbacks along the way, but fundamentally the market is now in bull mode and I am looking for a break of 1,700 in the near future and a test of higher levels soon."
Gold ETF holdings, often used as a measure of longer-term investor appetite for the metal, rose to a new record of 71.728 million ounces by the end of last week.
The net inflow for August stands at 1.898 million ounces, the largest one-month increase in holdings since last November.
The Fed holds its next meeting to discuss monetary policy on Sept. 12 and Friday's monthly employment figures could help further shape investor expectations for a third round of QE.
Investors are also awaiting details on the European Central Bank's plan to buy bonds of more indebted nations such as Spain and Italy to contain their borrowing costs and stop the spread of the debt crisis.
The ECB meets on Thursday to discuss interest rates and investors will be hoping for bank President Mario Draghi to use the post-decision news conference to outline how his proposed bond-market intervention program will work following his pledge in late July to do whatever it takes to defend the euro.
Platinum was up nearly 1 per cent at $1,543.99 an ounce, near its highest since early May as a deadly strike at the South African mining operations of world No. 3 platinum producer Lonmin continued.
Palladium was up 2.4 per cent at $630.00, while silver was up 0.3 per cent at $31.79 an ounce.