Gold shrugged off a tumbling U.S. dollar to fall more than 1 percent on Monday as investors cashed in on the metal's rally to a near three-decade high.
A sharp decline in global equity markets and a sell-off in other metals also prompted investors to pull out of the bullion market, analysts said.
But gold was likely to rebound and was seen hitting $800 an ounce by the end of the year, underpinned by a record low dollar against the euro, tensions in the Middle East and strong oil prices.
Sentiment in the gold market has been bearish because of the comments coming out of the G7 and people are worried about U.S economic growth. We are a little bit in a cycle of risk reduction and people are taking profits, Tom Kendall, metals strategist at Mitsubishi Corporation, said.
I think this is a pause before we resume the upward trend. This week's U.S. data, including on consumer confidence and homes sales, might be quite negative for the dollar. So that should help us turnaround in gold fairly quickly.
Spot gold fell as low as $754 an ounce before rising to $756.00/756.80 by 6:11 a.m. EDT, compared with $765.30/766.10 in New York late on Friday, when it hit a 28-year peak of $770.
The dollar hit a record low versus the euro as traders seized on the Group of Seven finance officials' apparent indifference toward dollar weakness as a cue to dump the currency.
A weaker dollar makes gold cheaper for other currency holders and often lifts bullion demand.
TRACKS EQUITY MARKETS
Dresdner Kleinwort Investment Bank said in a daily report that gold gained in the early trade on a weaker dollar, but a sharp decline in equity markets pulled the metal down.
Britain's leading share index fell 1.6 percent, tracking sharp losses in the U.S. and Asian markets on renewed concerns about the damage from a housing slump in the world's largest economy. South Africa's blue chip Top-40 stock index fell by close to two percent.
Gold traditionally has been used by investors as protection against economic and political uncertainty, but sometimes it behaves much like other financial assets because of the growing role of commodities in diversified portfolios.
The fragile U.S. economy and persistent rises in crude oil will add enough technical momentum for gold to clock higher, Pradeep Unni, an analyst at Vision Commodities in Dubai, said.
Once gold sustains above $770, then the levels above $790 are easily attainable. Though momentum indicators are in highly overbought levels, it's ideal to be on the buy side until there are strong signals of reversals, which is a close below $754.
Oil prices fell on profit taking from record highs, but clung to $88 a barrel on violence between Turkish soldiers and Kurdish guerrillas and a record-low dollar.
Turkey vowed on Sunday to take tough action after Kurdish guerrillas killed 17 of its soldiers, but said Washington had asked it to hold back for a few days more from sending troops to the rebels' hideouts in northern Iraq.
In other markets, Tokyo gold futures contract for August 2008 fell to its lowest in nearly two weeks at 2,781 yen per gram on a firm yen. U.S. gold futures fell, with the December contract trading down $8.7 an ounce at $759.70.
Platinum was down at $1,425/1,430 an ounce, compared with $1,441/1,446 in New York on Friday when hit a record high of $1,454 on supply concerns.
Palladium fell to $355/358 an ounce from $366/370, while silver dipped to $13.36/13.41 from $13.52/13.57.
(Additional reporting by Lewa Pardomuan in Singapore)