Gold edged higher on Tuesday, drawing strength from a modest recovery in the euro, but the threat from the escalating euro zone crisis was likely to temper gains in both markets.
Spot gold was up 0.4 percent at $1,579.40 an ounce at 1404 GMT, off an earlier high of $1,582.40, while U.S. gold futures for June delivery were up 0.65 percent at $1,579.50.
Gold is set for a 5 percent decline in May, which would be its worst monthly performance this year and a fourth successive month of losses, its longest stretch since January 2000.
It has struggled to overcome this month's hefty losses in the euro. Gold reacted positively to stresses in the euro zone in 2011 as investors bought the metal as a haven from risk, but it is now under pressure from dollar strength.
The euro briefly pulled away from two-year lows against the dollar earlier on market talk of the European Central Bank making an announcement on action to recapitalize the region's banks, which the central bank subsequently denied.
Gold has been in modest recovery mode since last week. The next big level is $1,620.00 and unless we get a significant decline in the euro, then I think gold is likely to trade higher, James Steel, an analyst at HSBC, said.
The problem is that Greece, or some of the more highly indebted states garner the attention and the euro tends to weaken and gold follows suit, he said.
One of the largest obstacles facing the bullion market right now is gold's inverse correlation to the dollar, which is close to its most negative in more than two years, meaning that a rise in the dollar is more likely to hamper gold.
Investors and speculators last week made their most aggressive bet against the euro since the inception of the single European currency on persistent worries over Spain's escalating borrowing costs and weakening banking sector, and Greece's election next month.
Gold will be in a critical position at least until the Greek general election taking place on June 17, said Peter Fertig, a consultant at Quantitative Commodity Research.
Should there be a majority for a government led by the conservative New Democracy, chances are quite good that gold would rebound, he said. That would also support the euro, it would support stock markets.
German government bond yields hit fresh lows and Spanish yields held near peaks meanwhile, pressured by indications that Madrid will recapitalize nationalized lender Bankia by issuing new bonds.
PAYROLLS DATA EYED
Attention is already shifting towards U.S. employment data due Friday, an important barometer for economic recovery. The non-farm payrolls report is expected to show the world's largest economy added 150,000 new jobs in May.
A shift in focus from European to U.S. economic problems could prove positive for gold, if it takes some of the heat out of dollar strength, analysts said.
From a technical perspective, gold has found solid support just below $1,530 an ounce, but has struggled to breach the $1,600 an ounce level.
Among other precious metals, silver was down 0.7 percent at $28.21 an ounce. The metal has underperformed gold this month, and is on track to fall nearly 9 percent, having touched a 2012 low earlier in May at $26.73 an ounce.
Spot platinum was up 0.3 percent at $1,436.99 an ounce, while spot palladium was up 1 percent at $607.97 an ounce.
The gold/platinum ratio, a measure of the number of platinum ounces needed to buy an ounce of gold, held at its highest since January at 1.1.
Platinum has maintained a historically unusual discount to gold for much of the last nine months.