(REUTERS) -- Gold fell on Friday as investors took profits after an initial rally driven by growing confidence that Greece was edging closer toward winning a new rescue package.
Bullion rose earlier in the session as buying sentiment gained a boost from news China's central bank might have used some of its massive foreign reserves to import gold late last year.
The metal, however, fell along with the euro and U.S. equities due to jitters ahead of a critical Monday meeting of euro zone finance ministers to finalize the Greek bailout deal. The associated uncertainty prompted some investors to close out positions ahead of the U.S. Presidents Day holiday on Monday.
Gold cannot seem to break away from the influence of the wider financial markets, said James Steel, chief commodity analyst at HSBC.
The eventual settlement of the euro zone sovereign debt crisis should eventually break this link. Until then, gold trading is likely to be volatile and prone to chase euro zone and especially Greek headlines, Steel said.
Spot gold was down 0.5 percent at $1,720.48 an ounce by 11:45 a.m. EST (1645 GMT).
The metal is on track for a flat finish for the week, as Friday's decline erased recent gains stemming from optimism surrounding Greece and the euro zone debt crisis.
U.S. gold futures for April delivery fell $6.20 to $1,722.20 an ounce.
The metal largely ignored news that overall U.S. consumer prices rose in January, boosted by a surge in gasoline costs. The 0.2 percent increase in the consumer price index shows inflation remains largely under control.
Gold's recent tight correlation with the euro means the gyrations in the single currency are exerting a greater impact on bullion than its traditional safe-haven appeal.
The metal gained earlier after a top Chinese government think-tank source said China's central bank, flush with foreign reserves, may be behind the surge in the country's gold imports late last year.
Spot gold is up 10 percent so far this year, inspired largely by the Federal Reserve's signal that U.S. rates are unlikely to move beyond zero for some three more years, which prompted talk of more gold-bullish quantitative easing.
GOLD ETF HOLDINGS RISE
Holdings of gold in exchange-traded products have risen by over 100,000 ounces this week to 70.343 million ounces, reflecting an ongoing desire to tap into the bullion market.
Gold-price volatility could rise as February options on the world's largest gold ETF, SPDR Gold Trust, expire later on Friday, with most open interest for strikes close to the money stacked at put options, which offer holders the right to sell shares at a given price.
Platinum was the strongest performer of the precious metals complex so far on Friday, up 0.3 percent at $1,624.49 an ounce. It has been boosted by supply worries.
Palladium fell 0.8 percent to $686 an ounce, while silver dropped 0.9 percent to $33.15 an ounce.