Gold rose in Europe on Tuesday as the dollar index hit a 12-week low and geopolitical tensions centered on Egypt added risk premium to prices, with Asian demand for coins and bars after January's price drop adding support.
However, the metal is expected to stay under pressure after posting its biggest one-month drop since December 2009 in January as investors' appetite for risk improved, diverting interest from so-called safe havens like gold into higher-yielding assets.
The largest gold exchange-traded fund, the SPDR Gold Trust, saw its second-largest monthly outflow ever in January, while the iShares Silver Trust, the main silver ETF, said its holdings fell by the most ever in a single month.
Spot gold was bid at $1,338.40 an ounce at 1015 GMT, against $1,331.90 late in New York on Monday. U.S. gold futures for April delivery firmed $5.10 an ounce to $1,339.60.
The dollar index, which measures the U.S. unit's performance against a basket of six other currencies, slid to a 12-week low on Tuesday, knocked by gains in the euro after inflation data beat forecasts.
This lifts gold as it makes dollar-priced assets cheaper for other currency holders, but is unlikely to remain a major source of support. The usual strong inverse relationship between the two has weakened considerably since the financial crisis hit.
The dollar as well as gold is used as a fear indicator, and fear seems to have left the market, said Commerzbank analyst Eugen Weinberg. Right now confidence is coming back into the market and safe havens are not so much in demand.
That is why we are seeing gold under pressure. I wouldn't be surprised if this correction we have seen over the last month continues. While gold is taking support from Asian demand and concern over Egypt, this is unlikely to hold, he said.
Crowds gathered in central Cairo on Tuesday for a protest they hoped would swell to a million people demanding an end to the 30-year-rule of President Hosni Mubarak.
A lot depends on what happens in Egypt, with violence potentially escalating due to planned mass protests at the start of this week, said VTB Capital's Andrey Kryuchenkov in a note.
BAR PREMIUMS RISE IN TOKYO
Asian physical gold demand lent some support to prices, although this is tailing off as China's Lunar New Year holiday celebrations get underway.
Premiums for gold bars soared to their highest in more than two years in Tokyo on Tuesday and could rise further as steady shipments to other bullion trading centers in Asia led to a tight supply, dealers said on Tuesday.
Among other commodities, oil prices edged a touch lower after hefty gains in the previous session that took Brent crude past the $100-a-barrel mark.
Sharply higher oil prices could weigh on platinum group metals prices if they affect car sales, UBS said in a note. Automakers are the main buyers of platinum and palladium.
The potential impact of dear oil was noted consistently by dealers, who fear that higher prices at the pump could hamper the fragile auto market recovery, UBS analyst Edel Tully wrote.
Over the coming months it will be important to monitor U.S. sales by auto type: if larger vehicles start to lose market share, it will be due to higher gas prices. Smaller vehicles imply smaller engines, and hence lower PGM loadings.
Platinum was at $1,811.99 an ounce against $1,791.50, while palladium was at $819.47 against $811.97.
Elsewhere silver was bid at $28.31 an ounce against $28.04. Silver underperformed gold in January, sliding more than 9 percent for its worst one-month performance since June 2009.