Gold prices retreated in choppy trade on Tuesday after earlier hitting record highs as a recovery in appetite for assets seen as higher risk, such as stocks, took the steam out of a rally that many saw as overdone above $1,900 an ounce.
A hike in margin requirements for gold forwards on the Shanghai Gold Exchange also helped curb the precious metal's scorching rise.
Spot gold was down 1.1 percent at $1,875.69 an ounce at 1406 GMT, having hit a record $1,911.46 an ounce in Asia. The metal is still up by nearly a third this year and is on track for its biggest one-month rise since September 1999.
There is a little bit of profit taking. The fact that gold prices didn't manage to stay above the psychologically important $1,900 mark might ... have driven selling, said Commerzbank analyst Daniel Briesemann.
But you shouldn't be too concerned if you were betting on higher prices. The closeness of the $2,000 mark should attract new buyers.
Fresh gains in equity markets are pointing to a pick-up in risk appetite, while industrial metals benefited from firm Chinese factory data.
A recovery in assets seen as higher risk is coming at gold's expense, leading investors to cash in gains.
The selling that is coming in feels much better quality than the buying that was taking it up. It is a bit frothy around these sorts of levels, said Simon Weeks, head of precious metals at the Bank of Nova Scotia in London.
We have the same old problems, and I think gold still has a role to play as a currency in its own right, he said. But in the same way that the world became over-reliant on the U.S. dollar as a reserve currency, I think we should exercise a bit of caution in becoming over-reliant on gold.
It has a role to play and will do for a long time to come, but whether that is at $2,000 or not remains to be seen. I don't think it needs to be as high as it is at the moment.
Asset returns in 2011: r.reuters.com/suz52s
Gold correlation with dollar: r.reuters.com/ryx52s
Inflation adjusted gold price: r.reuters.com/pun62s
Gold in different currencies: r.reuters.com/wun62s
Gold/silver ratio: r.reuters.com/xyx52s
Gold/platinum ratio: link.reuters.com/xez92s
SPECULATION GROWS OF CME MARGIN HIKE
The hike in SGE margin requirements also curbed some interest in the metal. Traders are eyeing potential rises in U.S. gold futures margins by CME Group, the last increase in which sparked a price correction.
We have certainly noticed an increase in clients looking to book profits, although it's not a dominant trend, said UBS in a note. We caution that the risk of CME margin hikes is rising; the SGE announced margin hikes overnight for its forward contract.
But even if a $150 or more pullback were to materialise, we'd strongly view it as a good buying opportunity. Quite simply, we think there are more than enough gold-friendly macro variables out there.
More positively for gold, speculation is also rife that the U.S. Federal Reserve will flag further stimulus when central bankers gather in Jackson Hole, Wyoming, late this week in response to the sluggish U.S. economy.
At the same meeting a year ago, Fed Chairman Ben Bernanke launched a second round of government bond buying, known as quantitative easing, to revive the economy. The move, which undermined the dollar, sparked a rally in gold.
Among other precious metals, silver was down 1.4 percent at $43.12 an ounce, spot platinum was down 1 percent at $1,880.99 an ounce, and spot palladium was up 0.4 percent at $760.72 an ounce.
The gold-to-platinum ratio remained near parity, a state it reached last week for the first time since December 2008, as gold traded increasingly strongly compared to platinum.
Platinum, as an industrial metal, is likely to struggle for buyers if growth slows, but it remains near three-year highs, benefiting from strength in gold, which is boosting interest in precious metals across the board.
Higher gold prices relative to platinum also encourage more substitution in the jewellery industry, analysts said.