Gold drops as dollar gains; loose central bank policy supports

By Melanie Burton

MELBOURNE (Reuters) - Spot gold fell more than 1 percent on Monday, as the dollar regained some ground in holiday thinned trade, but traders said the metal was well supported given a dovish stance from U.S. and European central banks.

Central banks, however, are leaving themselves with fewer policy tools, which means there's a diminishing window for fresh upside for gold based on further easing steps, said chief investment officer Jonathan Barratt of Ayers Alliance in Sydney.

"In my mind there's still concerns out there on price."

Spot gold fell by 1 percent to $1,242.60 a tonne by 0628 GMT, having finished last week a tad higher. Prices are consolidating below a 14-month peak of $1,282.51 struck on March 11, which was the loftiest since Jan 2015. Prices had slumped below $1,050 a tonne in December.

U.S. gold eased by 0.9 percent to $1,243.20.

"Due to the Easter holiday, the market will probably consolidate," a trader in Singapore said. "Overall the market trend looks weak but well supported, so if there are any moves, it's just to square positions for the week due to the holidays."

Market indicators are flashing signs that investors see inflation - after it was almost non-existent since the credit crisis - on the rise, despite scepticism from the Fed and the relatively slow pace of U.S. economic growth.

Inflation tends to burnish the investment allure of commodities because it consists of a rise in the value of hard assets.

Eroding support for precious metals, the dollar hit a session high, paring losses in the wake of dovish signals from the Federal Reserve.

Money managers trimmed their bullish gold bets from a 13-month high in the week to March 15, as they also cut a net long position in copper, U.S. Commodity Futures Trading Commission data showed on Friday.

In other metals, platinum and palladium edged down half a percent to $963.10 and $586.10 respectively.

(Reporting by Melanie Burton; Editing by Joseph Radford and Richard Pullin)