Gold eased back toward $1,200 an ounce in Europe on Friday as a slight recovery in the dollar prompted traders to cash in gains after the previous day's run-up to record highs.
The market is taking a breather ahead of key U.S. payrolls data later in the day. If the data beats or misses expectations, it could have a significant impact on the dollar, and consequently on gold.
Spot gold was bid at $1,204.95 an ounce at 6:53 a.m. EST (1153 GMT), against $1,207.10 late in New York on Thursday. U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange fell $12.10 to $1,205.30.
Spot prices struck a record high at $1,226.10 an ounce on Thursday amid expectations for persistent weakness in the dollar and rising inflation in 2010.
As soon as we score a record, we then seem to correct... but we can correct lower and still remain within the uptrend by a wide margin, said Calyon analyst Robin Bhar. If we can end above $1,200 today it will look good on the weekly chart.
He said the number of options at elevated levels in the gold futures market suggest hopes for higher prices are intact.
A trader said there has been some good upside buying in March and April in the $1,300s and even $1,400s, so there are some good bullish expectations out there, Bhar said.
Underlying prices gravitate toward the strike levels with the highest open interest, so... if open interest continues to build that is sure to bully the market toward that level.
In the shorter term, the market will be closely eyeing U.S. non-farm payrolls numbers due at 8:30 a.m. EST (1330 GMT) for their impact on the dollar, a major driver of the gold market.
Economists polled by Reuters forecast the U.S. economy lost 130,000 jobs in November, compared to 190,000 in October.
Poor unemployment figures could lead to gold weakness in the short term, but should lead to further safe haven demand on concerns about a double dip recession, said bullion dealer GoldCore in a note.
The dollar edged up 0.11 percent against a basket of currencies on Friday as investors awaited the U.S. government's monthly employment report for clues to the pace of recovery in the world's largest economy.
Other commodities edged lower, with oil prices declining for a third day on Friday and industrial metals also falling. Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation.
Investment demand for gold remained firm, with the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, saying its holdings rose 0.276 tons to 1,131.490 tons on Thursday.
Elsewhere, metals consultancy GFMS said China will overtake India as the world's largest gold consumer in 2009, with total demand forecast at 432 tons. Indian demand has been pressured this year by rising prices.
Among other precious metals, silver was bid at $18.80 an ounce against $18.80. The world's largest silver ETF, the iShares Silver Trust, said its holdings rose 113.05 tons to a record 9,514.35 tons on Thursday.
Platinum was at $1,480 an ounce against $1,480.50, while palladium was at $378 against $380.50.
ETF Securities, which operates exchange-traded products that issue securities backed by physical metal, said holdings of its platinum and palladium ETPs rose to record levels on Thursday, up 0.3 percent and 0.7 percent respectively.