Gold eased on Friday, tracking a dip in the euro as some investors cashed in gains in the single currency after a short-covering rally, and as markets awaited the outcome of talks between Greece and its creditors.
Stocks and other commodities also weakened as appetite for assets seen as higher risk faded.
Spot gold was down 0.3 percent at $1,652.16 an ounce at 1506 GMT, while U.S. gold futures for February delivery were down $1.5 at $1,653 an ounce. Gold has had a strong start to the year, rising more than 5 percent so far after a sharp price drop in December.
Low interest rates, strong physical demand from key Asian markets and concerns over the both the inflation outlook and sovereign debt are all lending support, but analysts say the precious metal could face some tough headwinds this year.
There are a lot of reasons still to buy gold, but I think it's fair to say that with risk fatigue setting in, a little bit of price sensitivity coming through, and the dollar likely to show some strength, the gains for gold in the current environment are probably less exciting than they were, said David Jollie, an analyst at Mitsui & Co Precious Metals.
The euro retreated from a two-week high against the dollar as some investors took profit, but traders said it looked likely to find support on cautious hopes Greece may be nearing a deal to avoid a chaotic debt default.
Greece resumed talks on Friday with its private bondholders on a long-awaited deal needed to prevent a default by Athens. It is pushing to wrap up an agreement by Monday that will pave the way for a fresh aid injection before 14.5 billion euros ($18.5 billion) of bond redemptions fall due in March.
Negotiations over the involvement of private creditors in the Greek haircut... are proving to be extremely difficult, Commerzbank said in a note.
There remains a high risk of an outright insolvency of Greece in the coming months, which could bring the sovereign-debt crisis back to boiling point. We therefore believe that demand for gold will remain high.
SHARES DRIFT LOWER
European shares also drifted lower after hitting a 5-1/2 month high in the previous session. Among other commodities, oil prices fell, with U.S. crude futures slipping back below $100 a barrel, while base metals like copper also eased.
Physical demand for the precious metal in India, the world's number one gold consumer, remained soft as the weaker rupee made the dollar-priced metal expensive for local buyers. Demand is also likely to ease in China, a key market, during next week's Lunar New Year holiday.
Gold prices look a little sluggish and while we do not foresee a big decline, the withdrawal of Chinese demand from the market may help edge prices lower, said HSBC in a note.
Gold's ratio to silver - the number of silver ounces needed to buy an ounce of gold - slipped to its lowest since mid-December on Friday at 54.19 as gold prices outperformed silver. Silver was down 0.03 percent at $30.54 an ounce.
Spot platinum was down 0.24 percent at $1,511.74 an ounce, while spot palladium was down 1.37 percent at $665.22 an ounce.
The gap between platinum market fundamentals and investor sentiment remains wide. While the outlook for industrial demand does not appear bleak, investors are cautious, said UBS in a note. We deem prices around $1,400 as attractive.
We maintain our cautious outlook on PGMs as a whole and shift our relative preference away from platinum this year, given its larger exposure to Europe and the potential supply overhang from (exchange-traded funds).