Gold retreated on Monday, after posting its biggest weekly gain in two months, amid expectations the US Federal Reserve is moving closer to raising interest rates.

The Fed holds a policy meeting this week and a recent spate of data that points to a strengthening economy could sharpen the case for the central bank to take a more hawkish stance.

US consumer sentiment

The latest upbeat evidence came on Friday when the Thomson Reuters/University of Michigan index of consumer sentiment jumped to a near eight-year high in December.

There is speculation in the market that the Federal Open Market Committee (FOMC) might remove the phrase “considerable time’’ with regard to the timeframe for raising interest rates, said Howie Lee, investment analyst at Phillip Futures.

“If they were to remove that phrase, I think they’re trying to prepare the market for an eventual rate hike and that could send gold further down,’’ said Lee, who pegs support for bullion at $1,140.

FOMC policy statement

The FOMC is expected to release a statement at the end of its two-day meeting on Wednesday, its last for the year, followed by a news conference by Fed Chair Janet Yellen.

Spot gold was down 0.4 per cent at $1,217.40 an ounce by 0232 GMT. The metal climbed 2.6 per cent last week, its largest such rise since October.

A hike in US interest rates curbs the appeal for non-interest bearing assets such as gold.

Investors were also cashing in recent gains after failing to convincingly breach the $1,235 key resistance level, Lee said.

US gold for February delivery slipped 0.3 per cent to $1,218.30 an ounce.

Crude oil

Gold was also taking a hit from further steep losses in oil prices, which touched fresh 5-1/2-year lows, hurting gold’s draw as a hedge against oil-led inflation.

Hostage crisis

Investors were also keeping an eye on Australia where dozens of hostages were trapped inside a central Sydney cafe on Monday, raising fears of an attack linked to Islamic militants.

Prime Minister Tony Abbott said he was convening a meeting of the Cabinet’s national security committee.

Australia, which is backing the United States and its escalating action against Islamic State in Syria and Iraq, is on high alert for attacks by radicalised Muslims or by home-grown fighters returning from fighting in the West Asia.

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