(REUTERS)-Gold retreated on Friday, shrugging off gains in the euro and struggling to maintain traction after this week's already hefty price climb, as buyers favored assets seen as higher risk such as stocks and industrial commodities.
Prices are still heading for a second monthly gain, however. Silver outperformed other precious metals to hit a fresh five-month high, after breaking a key technical level on Thursday.
Spot gold was at $1,775.94 an ounce at 1300 GMT against $1,779,79 late on Thursday.
The euro hit a 2-1/2-month high against the dollar, building on gains it made a day earlier after improved German business sentiment data and on lingering relief over an agreement for a second bailout of Greece.
A consequently weaker dollar would usually weigh on gold. However, gold's relationship with the currency markets sometimes breaks down when risk appetite is unusually weak or strong, as the metal itself is often seen as a haven from risk.
It depends what the driving factors are for euro strength and dollar weakness, said Commerzbank analyst Eugen Weinberg. In this case, demand for safe havens is likely to be less pronounced, especially as gold prices are still relatively high compared to where they were at the beginning of the year.
It's not unlikely that we'll see further profit-taking.
Sharper appetite for higher-risk assets drove stocks higher in Europe, while safe-haven German government bonds dipped. Oil prices meanwhile extended this week's strong gains as investors fretted over Iranian supply.
A two-day meeting of Group of 20 finance ministers and central bankers this weekend is likely to be dominated by talk of the euro zone debt crisis.
Gold has risen 13.7 percent this year and is heading for its best weekly performance in four, currently up 3.3 percent.
It's not our favorite position to go long gold at these high levels, LGT Capital Management analyst Bayram Dincer said. The potential for disappointment, and price consolidation, is a given.
Price strength weighed on physical gold demand as price-sensitive buyers, particularly in key Asian markets, held off making purchases.
While one would not expect strong physical demand as prices push higher, the overall weakness in physical demand of late has caught our attention, said UBS in a note.
U.S. Mint sales of American Eagle coins so far this month have fallen dramatically ... (while) in India, volumes have eased this week. SGE premiums have been hovering at the lower end of the range, reflecting consistently muted demand out of China post-Lunar New Year.
Silver prices were flat at $35.33 an ounce, having earlier touched a five-month high at $35.70 an ounce. On Thursday silver's climb picked up momentum after breaking through its 200-day moving average at $34.84.
Prices are up 7.1 percent this week for their best weekly performance since mid-January. It is set for a gain of nearly 30 pct so far this year, making it the best performing precious metal so far in 2012.
There is key support around $33.60 from the trendline off the December low, said ScotiaMocatta in a note. We are bullish so long as we remain above the trendline. The next target is $35.68, the October high.
The gold/silver ratio, the number of silver ounces needed to buy an ounce of gold, dipped to 50 on Friday, its lowest since late October, as silver prices outperformed.
Platinum group metals, meanwhile, took a breather after hitting five-month highs earlier this week after a strike at Impala Platinum's Rustenburg mine, the biggest of its kind, turned violent.
Impala warned customers earlier this week that its April platinum deliveries would be down about 50 percent due to labor problems at Rustenburg.
Spot platinum was down 0.6 percent at $1,707.74 an ounce, while spot palladium was down 1.3 percent at $707.47 an ounce.