More QE nervousness sends gold price below $1,600

The gold price dropped through the psychologically important $1,600 level on Monday after comments from the president of the New York Federal Reserve and initial optimism about the Cyprus bail-in deal.

Gold was hurt by comments from Bill Dudley, a prominent dove on the Federal Open Market Committee, that seemed to indicate that the US central banks quantitative easing program remain up for review.

The banking rescue package for Cyprus negotiated in Europe over the weekend also diminished gold's status as a safe haven.

The yellow metal gradually recovered during the day to $1,606 in New York trade after closing at a low of $1,596.10 an ounce in Europe dealings as doubts about the effectiveness of the EU measures crept back in.

In a speech on Monday, Dudley said "at some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases," but added that bad news could send purchases back up again.

QE, which floods markets with cheap money, increases gold's allure as a hedge against inflation amid currency depreciation. Any change to this dynamic spells trouble for gold.

The Fed's balance sheet crossed the $3 trillion mark early into 2013 through the buying of Treasurys and mortgage bonds to the tune of $85 billion a month.

In February, US Federal Reserve minutes showed changes to its QE program are being contemplated sending the price of gold skidding $40 an ounce in one session to a 2013 low of $1,562.

Although it has recovered since, the gold price remains 4.8% below its opening levels for the year.

The first QE program was announced by chairman Ben Bernanke in December 2008 when an ounce of gold cost $837.50.