Gold eased on Friday, taking a breather from this week's march higher as the euro dipped and other assets rose, but stayed on track for its biggest two-week rise in two months as investors returned to the market after last month's price drop.

Spot gold was down 0.5 percent at $1,641.80 an ounce at 1240 GMT, while U.S. gold futures for February delivery were down $4.50 an ounce at $1,643.20.

Cash gold prices have risen 5 percent so far this year despite a firmer tone to the dollar, as investors bought back into the market after gold's 10 percent price drop in December.

I'm always a bit suspicious of interpreting too much of price action in the first couple of weeks of a new year. It's not typically very fundamental, said Deutsche Bank analyst Michael Lewis. It could well be valuational momentum that is driving these moves rather than anything else.

In the longer term, however, he said indications were positive for gold. We have central bank diversification, which we think is a bigger flow story than exchange-traded fund buying. We're also looking for dollar weakness to come back.

We still like the gold story because of negative real interest rates, he added.

Goldman Sachs also said it expects fresh gains in gold this year due to the depressed real interest rate environment. It has a 12-month view on gold of $1,940 an ounce.

European shares rose on Friday after an Italian bond auction generated solid demand, although it was not as spectacular as Thursday's Spanish debt sale. The euro eased a touch against the dollar, meanwhile.

On Thursday, the European Central Bank said its flood of cheap three-year loans was helping banks and supporting morale across the euro zone.

Interest rates in the euro zone are unlikely to go higher... keeping the euro area yields depressed, said VTB Capital in a note.

Additional liquidity and accommodative monetary policy will cause even more players to seek real value in precious metals as inflation expectations also start to shift, provided policy measures are successful and growth starts recovering.

LUNAR NEW YEAR LOOMS

In China, the world's second-largest gold consumer, the Shanghai Gold Exchange said on Friday it will temporarily raise margins and daily trading limits for its gold and silver forward contracts on Jan. 20 ahead of the week-long Lunar New Year holiday.

Average turnover, excluding futures, on the SGE in the first fortnight of this month has been 19 percent higher than in the two weeks preceding Chinese New Year in 2011, Rhona O'Connell of metals consultancy Thomson Reuters GFMS said.

Gold buying in China is likely to ease off as the Lunar New Year celebrations get underway, however.

We would expect that physical interest will have trailed off significantly out of China by the latter half of next week, said UBS in a note.

Nonetheless it is important to highlight that the market doesn't have the same expectations for Chinese gold imports in the lead-up to the holidays, compared to those seen last year.

And as the most recent Hong Kong trade statistics to China revealed, this market shipped in very impressive volumes before year-end, which probably suggests that there isn't much of a shortage of gold internally to meet local demand.

A rise in the rupee to its highest level in five weeks has prompted Indian jewellers to stock up ahead of the upcoming wedding season, meanwhile.

Among other precious metals, silver was down 1.3 percent at $29.86 an ounce. Spot platinum was down 1 percent at $1,472.23 an ounce, while spot palladium was down 1.8 percent at $624.55 an ounce.

Platinum is on track for its best weekly performance since October, however, up 5.8 percent. The metal received a fillip from concerns over South African power supply, which state power utility Eskom said could be under pressure this year.