Gold rose more than one percent on Friday but was on track for its biggest quarterly gain this year as concerns that the euro zone debt crisis was far from resolved weighed on stock markets and the euro, lifting interest in bullion as an alternative.
The metal is set to end September with a loss of more than 10 percent, however, its worst monthly performance since Oct. 2008, after extreme volatility saw it peak at a record $1,920.30 an ounce and trade in a near $400 range.
Spot gold was up one percent at $1,929.79 an ounce at 1007 GMT.
The risk aversion that drove prices higher earlier in the quarter turned negative for gold as a slide in other assets prompted selling of the metal to cover losses elsewhere. A rise in margin requirements for U.S. gold futures also weighed.
Longer term, however, it is still expected to benefit from concerns over the U.S. and euro zone economies and the instability of the wider financial markets.
Any time you have a sharp spike in risk aversion, gold prices tend to come off, and then once the markets start to normalise, prices tend to benefit, said said Bank of America-Merrill Lynch analyst Michael Widmer.
The fact that gold gets caught up makes perfect sense -- if you've got margin calls... and other positions under water, that will cause selling, he added.
Ultimately the fundamentals that we thought were positive for gold are still in place -- issues in Europe and the United States, slowing GDP growth, central banks doing their magic.
European shares opened lower on Friday and were on track to record their worst quarterly performance since late 2008 as markets grappled with slowing global growth and the long-running euro zone sovereign debt crisis.
The euro also slipped versus the dollar on doubts about the firepower of a strengthened euro zone bailout fund, leaving it on track for its biggest monthly loss in ten months, while German Bund futures rose.
Assets seen as higher risk, like stocks and the euro, lost the uplift they had received from the German parliament's approval of a plan agreed in July to expand the euro zone's bailout fund.
U.S. gold futures GCv1 for December delivery were up $15.50 an ounce at $1,632.80.
ETF INVESTORS HOLD FIRM
Holdings of the world's biggest gold-backed exchange fund, New York's SPDR Gold Trust , dipped by 10 tonnes, the exchange said on Thursday, but were almost unchanged month-on-month despite the fluctuations in gold prices.
The price drops were driven by investors' reaction to declines in equities, and were a combination of the need to raise cash or lock in profits, said HSBC in a note. As long as ETF holdings remain steady, we expect gold prices eventually to stabilize and resume their long-term advance.
Data from the International Monetary Fund showed central banks also added to gold reserves in August, with Thailand buying 9.3 tonnes last month, Russia adding 5.6 tonnes and Bolivia buying 7 tonnes of gold.
Demand for physical gold, which picked up as prices declined from record highs, remained a firm support to the market, with the advent of the Indian festival season helping drive buying in the world's biggest gold consumer.
The physical sector saw a buzz of activity in Hong Kong, with jewellers from China stocking up before the Golden Week holiday next week. Premiums for gold bars were steady at a 7-month high at $3 an ounce .
Silver was up 1.6 percent at $31.05 an ounce. Holdings of the largest silver ETF, the iShares Silver Trust , fell nearly 23 tonnes on Thursday.
Silver prices have also seen extreme volatility this month, in line with gold, and are set to end the month 25 percent lower, and the quarter down 10 percent.
Spot platinum was up 1.2 percent at $1,535.50 an ounce, while spot palladium was up 0.2 percent at $616.97 an ounce.