Gold fell on Friday as investors took profits after it posted its biggest daily rise in nine months, but was still set for the biggest weekly rise in three months on Iraq and a softer dollar after the Federal Reserve's comments.
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The Fed on Wednesday sounded comfortable about the outlook for inflation despite recent signs of a pick-up in price pressure. That dashed some expectations the U.S. central bank might have to start lifting interest rates earlier than expected.
"Yesterday's $50/oz move higher was mainly due to higher inflation expectations in the U.S. and the fact that the Fed was not able to cool them," ABN Amro analyst Georgette Boele said.
"That was coupled with oil moving higher on the back of tensions in Iraq," she added. "As prices moved very quickly higher yesterday we had stop losses triggered and short-term traders taking profits."
Spot gold dropped 0.5 percent to $1,312.80 an ounce by 1213 GMT, after jumping 3.3 percent in the previous session, when it hit mid-April highs of $1,321.70. The metal has gained about 3 percent for the week.
U.S. gold futures for August delivery were down 0.1 percent at $1,313.40 an ounce.
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The dollar, which fell after the U.S. Federal Reserve's comments that it could keep interest rates low in the longer term, was up 0.1 percent against a basket of main currencies, although still heading fr its biggest weekly loss since April.
A weaker U.S. currency makes dollar-denominated assets like gold cheaper for foreign investors.
"At this point, gold appears overdone," UBS strategist Edel Tully said. "Strategic buyers are remaining on the sidelines; this is a move that is currently dominated by short-term traders."
Gold's buying also rose on the conflict in Iraq, which lifted crude oil prices to nine-month highs earlier in the week.
The metal is usually seen as an hedge against oil-led inflationary pressures.
But physical demand for gold was soft. Traders said what little demand they had seen earlier in week had been erased by Thursday's price jump.
"Demand was slightly better when prices had steadied around $1,270 but with this move above $1,300, we have seen a pull back," said a trader in Hong Kong.
Private sector gold demand in China, which last year surpassed India to become the biggest consumer of the yellow metal, will be flat to slightly lower this year, an official from the China Gold Association said on Thursday.
Silver rose 0.2 percent to $20.69 an ounce after jumping 4 percent in the previous session.
Platinum fell 0.9 percent to $1,453.74 an ounce, after gaining 1.6 percent in the previous session.
Palladium dropped 1.1 percent to $824.22 an ounce, as investors monitored a five-month mining strike in major producer South Africa that looked set to drag on.
South African platinum union AMCU has made "unaffordable" new demands beyond a deal struck with producers last week, mining firms said on Wednesday, dashing hopes of an end to the country's longest and costliest mining strike.