Gold fell 2.4 percent on Wednesday as investors took profits after a failed bid to set another record high beyond $914, but analysts said it might rebound after a period of consolidation.
Falling oil prices also put pressure on the metal, but a struggling dollar and buying by jewelers might help the metal regain $900 soon, analysts said.
Spot gold hit a low of $877.80 and was quoted at $882.65/883.35 by 1123 GMT, against $899.50/900.20 late in New York on Tuesday.
The latest data shows that net COMEX gold positions and holdings in the physically-backed ETF have reached to record levels, said Suki Cooper, metals analyst at Barclays Capital, referring to U.S. gold futures and exchange-traded funds.
Given the speculative length, there is potential for short-term price corrections. However we would view these in the context of what remains a strong medium-term uptrend, buoyed by positive external drivers as well as constrained mine supply.
Gold held in New York-listed StreetTRACKS Gold Shares GLD.N, the world's largest gold-backed ETF, rose to a record high of 652.56 tonnes this week.
Gold rallied to $913.80 on Tuesday, just below its record highs, before taking a breather amid fears the credit market crisis could take a toll on global growth.
Investors closely watched currency and financial markets for direction. The dollar hit a 2-1/2 year low against the yen and a record trough versus the Swiss franc, as weak data increased fears of a U.S. recession. The greenback was relatively resilient against the euro, holding steady.
A dismal reading of December retail sales on Tuesday suggested the U.S. economy might be facing deeper problems, and tumbling global stock markets fuelled expectations the Federal Reserve was set to cut rates by as much as 75 basis points soon.
A rate cut tends to boost gold's appeal as an alternative investment. A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand. The metal is also generally seen as a hedge against oil-led inflation.
Oil slid more than $1 a barrel to the lowest in almost a month, pressured by further signs that slowing U.S. economic growth will erode fuel demand.
RIGHT TIME TO BUY GOLD ?
But some analysts advised caution.
We believe that there is a risk that the weakness in equities, FX carry trades, and ongoing strength in bonds will trigger a cross sector deleveraging whereby crowded trades will come under pressure, said John Reade, head of metals strategy at UBS Investment Bank.
We cut our one month forecast for gold to $850/oz and leave our 3 month forecast at $800/oz, but warn that an undershoot of this level is possible. We are watching positioning and jewelry demand for a signal to bang the table and buy gold again, but certainly not here or now.
In other bullion markets, the key Tokyo gold futures contract for December 2008 delivery closed at 3,048 yen a gram, down 116 yen or 3.7 percent from Tuesday's close. It briefly fell by the daily 120-yen limit to 3,044 yen.
U.S. gold futures fell after hitting another record high on Tuesday. The most active February contract fell $18.7 an ounce to $883.90 an ounce.
Platinum fell to $1,555/1,560 from $1,571/1,576 an ounce in New York and off Monday's record high of $1,590.50.
Silver fell to $15.84/15.89 an ounce from $16.10/16.15. Palladium dropped to $371.50/376.50 from
(Additional reporting by Lewa Pardomuan in Singapore)