Gold drifted further away from its recent record highs on weaker oil prices and a rebound in the dollar, but analysts said on Monday that sentiment was positive.
Concerns about the U.S. economic growth, expectations for further interest rate cuts and geopolitical tensions were likely to keep prices well supported, with investors keen to buy on price dips, they said.
The combination of lower oil prices and a stronger dollar may well see the gold price make its first examination of support at $850, said Tom Kendall, precious metals strategist at Mitsubishi Corporation.
However, we expect any dollar rebound against the euro to be short-lived and look for positive sentiment to come to the fore again in gold before the end of the week.
Gold fell as low as $855.20 an ounce and was quoted at $858.70/859.50 by 5:50 a.m. EST, against $862.00/862.70 late in New York on Friday and last week's historic high of $869.05. It surged 32 percent in 2007 and has gained 4.5 percent this year.
Investors started the first full trading week of 2008 by covering short positions in the dollar, helping it rebound from one-month lows versus a basket of major currencies set in the wake of weak U.S. jobs data on Friday.
A firmer dollar makes gold costlier for holders of other currencies and often lowers bullion demand. The metal is also generally seen as a hedge against oil-led inflation.
Oil prices fell, extending the previous session's decline, as the market mulled over gloomy U.S. economic data and the impact on demand should the world's top energy consumer slip into recession later this year.
Given the recent surge in metal prices, a period of consolidation is healthy for the longevity of the current bull trend, James Moore, metals analyst at TheBullionDesk.com, said in a market report.
With little improvement in the health of the U.S. economy, interest rates still forecast to move lower, record oil prices creating inflationary pressure and little improvement in the geopolitical climate, gold should remain in a strong mood and look to challenge $900 during the first quarter.
In other bullion markets, U.S. gold futures extended losses, with the most active February contract down $4.00 at $861.70 in electronic trade.
Trading volume in oil and metals on the Tokyo Commodity Exchange, Japan's top commodities bourse, jumped about 19 percent on Monday compared with the daily average of last year after the sessions were extended by two hours.
The benchmark December gold contract in Tokyo closed at a session high of 3,044 yen a gram, down 0.4 percent from 3,055 yen on Friday.
In market news, Turkey's gold imports rose 19.8 percent year-on-year to 230.8 tons in 2007, posting the third largest volume recorded, data from the Istanbul Gold Exchange showed.
Platinum fell to $1,528/1,532 from $1,541/$1,545 an ounce in New York on Friday, while palladium was flat at $365/$368. Silver dipped to $15.22/15.27 an ounce from $15.29/15.34 in the U.S. market.
(Additional reporting by Chikafumi Hodo in Tokyo)