Gold rose on Friday as the dollar declined but made its biggest monthly drop in five months on signs that recovery in the U.S. economy could lead to the curbing of easy central bank money.

Gold has shed more than 5 percent in November and has lost around a quarter of its value so far this year, which puts it on track to post its first annual loss in 13 years.

This month, gold slumped 5.5 percent, the most since June and the biggest drop in November since 1978.

"One reason for this, besides the still ongoing ETF (Exchange Traded Fund) outflows, is the weakness of Indian imports, a weakness which could well continue for some time yet," said Eugen Weinberg, head of Commodity Research for Commerzbank, referring to the weak monthly performance.

"After all, much higher physical premiums are prompting Indian households increasingly to fall back on gold scrap for the wedding season, which is now in full swing."

Gold has stayed below $1,300 an ounce for the past three weeks and has been largely rangebound in the last few sessions due to thin trading around the U.S. Thanksgiving holiday on Thursday. Spot gold rose 0.6 percent to $1,250.96 an ounce by 1:06 p.m. EST (1806 GMT).

This is down 5.57 percent from the end of October, its biggest monthly drop since June.

It had fallen to a 4-1/2 month low of $1,227.34 on Monday. U.S. gold futures rose 1.0 percent to settle at $1,250.40 an ounce. The contract dropped 5.59 percent in November, its weakest monthly performance since June.

The dollar fell 0.09 percent against a basket of currencies after paring losses, bringing support to the market, while U.S. Treasury yields steadied above 2.7 percent, and world shares rose.
"We are probably going to see gold coming back off again, as we have real yields in the U.S. moving up a little bit ... and equity markets stronger," Deutsche Bank analyst Michael Lewis said. "A strong payrolls number is also expected to lock much of a move higher in gold."

Traders see the next resistance levels at $1,255 and $1,290, while support stands in the $1,220 area.

"Given recent development in key explanatory variables, our gold fair-value model suggests that prices are marginally overvalued in November and that the average price will approach $1,243/oz in December 2013," Barclay's said in a research note.

Solid U.S. data over the past few weeks could bolster the case for the U.S. central bank curbing stimulus soon.

Monthly bond purchases worth $85 billion by the U.S. Federal Reserve over the past few years have burnished gold's appeal as an inflation hedge. The next major data release, U.S. non-farm payroll figures, is scheduled for Dec. 6. The Fed's next policy meeting will be held Dec. 17-18.

PHYSICAL SUPPORT

Gold buying by China, set to become the world's biggest consumer of gold this year, picked up this week. On Thursday, traded volumes of 99.99 percent purity gold on the Shanghai Gold Exchange hit their highest in seven weeks. percent to $1,361.99 an ounce and spot palladium turned down 0.08 percent to $715.60 an ounce.