Gold eased but held near 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 by 4.8 percent in August, marking its third successive monthly gain and 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 programme of bond buying to keep interest rates low.
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 eased by 0.2 percent to $1,687.41 an ounce by 1200 GMT, having touched a five-month high of $1,692.71 on Friday, when it rose 2.1 percent in its largest one-day rally since late June.
U.S. gold futures for December delivery were up 0.1 percent at $1,690.00 an ounce. The U.S. market was closed on Monday for a public holiday.
"Investors were waiting for Jackson Hole. There has been a lot of talk of investors sitting on their cash and leaving it idle as they don't trust where to put it. So they're either hoping for cheaper levels, which I don't think will materialise now, so the question is will they (buy) now or at $1,700?" Afshin Nabavi, head of trading at MKS Finance said.
"Looking at the mess that is going on right now politically and economically, I would think there is a possibility for gold to go to $2,000, but we will have to see if it can break the highs around $1,920."
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.
The dollar price of gold is still 12 percent below last September's record at $1,920.30, while gold in euros is just 2 percent 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.
"GRAVE CONCERN"
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."
Data from the U.S. Commodity Futures Trading Commission (CFTC) on Friday showed speculative holdings of gold futures, as reflected by the net non-commercial position on COMEX, rose by the most since late January, with 27,800 lots added to bring the total position to a one-month high of 158,490 lots.
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 September 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 programme will work following his pledge in late July to do whatever it takes to defend the euro.
Platinum was up 0.4 percent at $1,535.74 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
Palladium was up 1.9 percent at $626.97, while silver was up 0.3 percent at $31.78 an ounce.
