Gold dropped to fresh eight-month lows on Monday on fears that the US Federal Reserve may signal an early interest rate hike at this week's policy meeting, while the strength in the dollar and weak physical demand also weighed on bullion.
    
Spot gold fell to $1,225.30 an ounce, its lowest since January, early on Monday before steadying at $1,227.70 by 0020 GMT. Last week, the metal dropped 3 per cent as the dollar index posted its ninth straight weekly gain.

Silver fell 0.2 per cent to trade near a 14-month low.

The Fed is facing perhaps its most pivotal meeting of the year this week, as it debates a potential overhaul of its guidance on interest rates and seeks to nail down a plan for exiting its extraordinarily easy monetary policy.

Investors will parse the U.S. central bank's words closely for any clues on the timing of the first U.S. rate hike in more than eight years. The Fed will begin its two-day policy meet on Tuesday.  Any hike in interest rates would dim the appeal of gold, a non-interest bearing asset.

The dollar, which has been gaining in strength in recent days on hopes of a more hawkish Fed, has also been hurting gold.

Physical demand has been weak despite the drop in prices as buyers expect further declines.

Hedge funds and money managers cut bullish futures and option bets in gold to their lowest in nearly three months, the Commodity Futures Trading Commission said. – Reuters