Gold rose on Tuesday as the euro climbed against the dollar, but gains in both were muted ahead of this week's European Central Bank meeting as investors weighed up the prospects of definite action to tackle the euro zone debt crisis.
The metal rose through $1,625 an ounce for the first time since mid-June on Friday and the euro hit a three-week high against the dollar after ECB chief Mario Draghi pledged to do anything necessary to protect the single currency from collapse.
But that surge has lost steam as investors weigh up the prospect of Draghi disappointing the markets. While the ECB has raised expectations of some kind of announcement on the bloc's burgeoning debt crisis, concrete action may still be weeks away.
"Market expectations regarding additional monetary policy measures are too highly optimistic," Bayram Dincer, an analyst at LGT Capital Management, said.
"The market interpretation of those signals from Draghi's wording was for (action to be announced at) the Thursday ECB meeting, which is too early in my view," he added. "The negative price dynamic post-ECB could range between $50-60, equivalent to the price gains after Draghi's comment. But we expect good support at the $1,560 price level."
Spot gold was up 0.4 percent at $1,626.28 an ounce at 8:47 a.m. EDT (1247 GMT), while U.S. gold futures for August delivery were up $6.90 an ounce at $1,626.60.
The euro rose 0.3 percent against the dollar, but stayed off three-week highs as traders tempered expectations for the ECB meeting. European shares eased and German Bund futures extended gains.
Gold priced in euros was flat at 1,321.36 euros an ounce, but held near Monday's five-month high. It has outperformed spot prices this month, up 4.7 percent so far in July, against a 1.8 percent rise in dollar gold.
Ahead of the ECB meet, attention was focused on the Federal Reserve, which begins a two-day policy meeting later on Tuesday, though analysts said immediate action from the Fed was unlikely.
Swiss bank UBS on Tuesday lifted its one-month gold forecast to $1,700 an ounce from $1,550, citing expectations the Fed's Jackson Hole meeting in August could be significant for policy expectations ahead of the September FOMC meeting.
It also lifted its three-month forecast to $1,750 an ounce from $1,600, which it said takes into account the U.S. elections in November and the looming U.S. 'fiscal cliff', when the expiry of some tax cuts will coincide with planned spending reductions.
Interest in physical gold was lackluster, with demand from major consumer India crimped by higher prices and the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, on track for its biggest monthly outflow this year in July.
Holdings of the exchange-traded products tracked by Reuters, which include the SPDR along with funds operated by ETF Securities and Zurich Kantonal Bank, are set to decline for a third straight month in July, down around 3 tonnes.
The U.S. Mint's sales of gold and silver American Eagle coins were also set to hit their lowest since April, at 30,500 ounces and 2.278 million ounces respectively, the weakest July sales of gold American Eagles in five years.
Much higher gold exports to Iran helped narrow Turkey's trade deficit by more than expected in June, data showed on Tuesday.
Gold sector officials have said Iranians were turning to gold for savings and possibly trade as Western sanctions tighten to force Iran to curb its nuclear program.
Silver was up 0.5 percent at $28.28 an ounce, while platinum was up 1.3 percent at $1,428.74 an ounce and spot palladium was up 1.3 percent at $590.72 an ounce.