Gold set for biggest weekly drop in six on inflation, rate-hike worries

"Recent data have decreased the probability of a rate hike at the next FOMC meeting, but global interest rates continue to climb and the recent increase in oil prices could drive the Federal Reserve to take a more hawkish stance on U.S. interest rate policy," Gaffney said.

Traders are now pricing in about a 53.3% chance of a U.S. interest rate hike in September, according to the CME FedWatch Tool.

On Thursday, Fed Vice Chair Philip Jefferson suggested he would be open to raising rates if there was no near-term improvement in inflation.

However, "gold's share in private portfolios remains low, and recent geopolitical developments, including Iran and broader tensions, may accelerate diversification beyond central banks to private investors," Goldman Sachs said in a note.

Among other metals, spot silver XAG= fell 0.8% to $55.05, platinum dropped 3.3% to , and palladium slipped 1.5% to . All three metals were headed for weekly losses.