Gold steadied on Wednesday, after rising for four days straight, as the intensifying euro zone debt crisis threatened to undermine the euro and offset any potential safe-haven demand for the metal.
The euro rose on Wednesday but has come under pressure in the past week as the debt crisis has reignited. The focus is now on Spain, where the head of the central bank said on Tuesday commercial banks would need more capital if the economy continues to deteriorate.
Benchmark 10-year Spanish yields touched 6 percent for the first time since early December on Wednesday, having risen by more than two-thirds of a percentage point in the past week alone, while peripheral banking stocks have been pummeled.
Spot gold was last down 0.1 percent on the day at $1,659.00 an ounce by 1:25 p.m. EDT (1525 GMT), while U.S. June futures were down 0.1 percent at $1,659.90 an ounce.
Gold in euros was last down 0.5 percent at 1,261.72 euros an ounce, having touched two-week highs the previous day above 1,271.00 euros.
The broader macro environment still remains positive. In the near term, the floor will be set by a combination of how strong investment demand is and how responsive the physical market is Suki Cooper, an analyst at Barclays Capital, said.
Investment in gold has cooled somewhat. Speculators have cut their ownership of U.S. gold futures by more than a quarter since late February, although holdings of the metal in exchange-traded funds remain near record highs above 70 million ounces.
Gold has found more support recently, but it doesn't have all of the catalysts in place to be driven substantially higher yet, Cooper said.
EURO TIES STRENGTHEN
The correlation between gold and the euro/dollar exchange rate strengthened on Wednesday to reach its most positive since early January, above 65 percent. That means the gold price is more likely to move in tandem with the single European currency than it was just six weeks ago.
We think gold will be in a range of $1,600 to around $1,690 or $1,700, which is a fairly wide range. But I think it will be difficult for gold to break out of that range, Standard Bank analyst Walter de Wet said.
What we are seeing is growing interest to buy in the physical market below $1,630. Should we drop below $1,600, the demand will be pretty strong, he said.
Metals consultancy GFMS, a unit of Thomson Reuters, said in its annual outlook for the gold market that a record high price above $2,000 an ounce next year could mark the peak of the precious metal's bull run of more than decade as monetary policy in major economies starts to tighten.
Gold prices for now are likely to drive above $2,000 as concerns over the euro zone debt crisis persist and the idea of more U.S. monetary easing gains support, GFMS Chairman Philip Klapwijk told Reuters.
In Europe, Italian one-year borrowing costs rose for the first time since November at a sale of short-dated paper on Wednesday, reflecting fresh doubts in the market about the more indebted euro zone nations and nerves ahead of a larger three-year sale on Thursday.
On the demand side, Hong Kong's gold exports to China rose 20 percent in February on the month as appetite for the precious metal remains strong in China, which is expected to overtake India as the world's top gold consumer this year.
Some suspected the number could include purchases from the public sector, as the market was largely quiet during a post-Lunar New Year holiday slump in February.
On the public level, China's central bank will continue to accumulate gold, which is easier than liberalizing their capital account and currency, said Jeremy Friesen, a commodity strategist at Societe Generale, adding that building gold reserves would help China's push to turn the renminbi into a global currency.
Accommodative monetary policy will remain an incentive for private investors to buy into gold, he added.
Silver fell 0.3 percent to $31.69 an ounce, pushing the number of ounces of the metal needed to buy one ounce of gold up to 52.5 from 50 just one week ago, reflecting gold's relative outperformance.
Platinum and palladium eased, with platinum down 0.4 percent at $1,585.74 an ounce and palladium off 0.5 percent at $633.22 an ounce.
Data earlier in the day that showed car sales in China had cooled in March following sharp gains in February weighed on palladium.
Palladium is used mainly in catalytic converters in engines of vehicles powered by gasoline. China is now the world's largest car market and is chiefly gasoline-driven.