(Reuters) - Gold eased on Wednesday as the euro declined but was still near one-week highs on signs of improved consumer demand in Asia, prompted by last week's price drop to six-month lows.
Gold eased from earlier session highs after the euro's rally against the dollar petered out, deterring investors from stepping up any bullion purchases.
In Europe, yields on peripheral euro zone debt edged higher after data showed commercial banks hoarded a record amount of cash at the European Central Bank, highlighting the fear financial institutions have about lending to each other.
Spot gold was last down 0.3 percent on the day at $1,598.74 an ounce at 1214 GMT, while most-active COMEX February gold futures were flat at $1,600.20.
The physical demand side of things will be the big factor helping to take prices back up again, along with dollar weakness, Daniel Smith, commodities analyst at Standard Chartered, said.
It's difficult to have a strong view around Europe, just because people are already quite pessimistic. I'm not sure things will get worse, so (the view is) a bit neutral ... I tend to think the risks are skewed to the upside with gold, he said.
The decline in the gold price towards the end of 2011 appears to have lured some buyers out of the woodwork following a fairly lackluster previous few weeks, due in large part to the weakness in the Indian rupee against the dollar, which suppressed demand in the world's largest consumer of gold.
The Shanghai Gold Exchange registered record-high trading volumes on Wednesday, and local dealers in Singapore said they expected demand to pick up next week ahead of the Chinese New Year.
Our physical sales to India yesterday were about double average levels, wrote UBS analyst Edel Tully. The key factor in this market right now is not purely the gold price, but stabilization in the rupee. China returned to the market today, and based on turnover on the SGE they're liking gold.
The dollar edged higher against a basket of major currencies .DXY.
The Federal Reserve's decision on Tuesday to publish the longer-term forecasts of its policymakers could push back expectations of when U.S. benchmark rates will rise, creating a potential future boost for gold.
The decision is seen as a significant milestone in Chairman Ben Bernanke's push for greater policymaking transparency, and it could offer the economy a bit more of a lift by better aligning financial market bets with the main view at the central bank.
Gold tends to benefit from an environment of low interest rates because the opportunity cost of holding it - the premium investors forfeit by not holding yield or dividend-bearing stocks or bonds - declines.
In the Middle East, tensions between Iran and the West moved a notch higher after Tehran issued its most aggressive statement yet as new U.S. and EU financial sanctions take a toll on its economy.
Iran threatened this week to choke off crude shipments through the strategic Strait of Hormuz in retaliation against tougher sanctions from the West over its nuclear program.
With 40 percent of the world's internationally traded oil moving through the Strait of Hormuz, even a low probability of the strait's closure - Iran threatened to do this last month if it were subject to further sanctions - can have a material impact on oil and hence on gold prices, James Steel, analyst at HSBC, said.
Silver fell by 1.3 percent on the day to $29.24 an ounce, pushing the number of ounces of the metal needed to buy an ounce of gold up for the first time since Friday.
The gold/silver ratio is now at 54.58, having fallen from last December's 14-month high of 57.4, when gold's outperformance against silver reached its strongest since October 2010.
Platinum was last down 0.2 percent at $1,422.49 an ounce, while palladium eased 0.3 percent to $657.47 an ounce.
Over the last month, palladium has easily outperformed the other three major precious metals, having risen by nearly 2.5 percent, compared with price losses in gold, silver and platinum in this time.