Gold prices rose back above $1,560 an ounce in Europe on Friday, snapping four sessions of losses, as the euro recovered from two-year lows against the dollar, though worries over the outlook for the euro zone kept investors on edge.
Spot gold was up 0.4 percent at $1,563.71 an ounce at 7:14 a.m. EDT (1114 GMT), having fallen as low as $1,533.41 earlier this week as worries that Greece could be set to exit the euro zone hurt the euro and boosted interest in the dollar as a haven from risk.
It remains on track for a 1.9 percent loss this week.
Gold's direction seems to be driven more by the level of market risk aversion and the euro currently, BNP Paribas analyst Anne-Laure Tremblay said.
Market sentiment on gold is fragile at the moment. There have been tentative rebounds, but so far bullish momentum has yet to materialize, she said. A shift to a more accommodative monetary policy stance may be needed to sustain a gold bull rally.
The euro rose from early lows against the dollar on Friday as bearish investors took a breather from a sharp sell-off this week, although confidence in the unit remained fragile.
Concerns about Greece leaving the euro zone prompted macro funds, real money and institutional investors to ramp up selling of the currency this week after an inconclusive election left the country at risk of bankruptcy.
European shares steadied meanwhile, recovering losses made after Belgian deputy Prime Minister Didier Reynders issued fresh warnings over Greece. .EU
Precious metals dealers are awaiting U.S. Commodity Futures Trading Commission data due later in the day for clues on investors' interest after net long managed money in U.S. gold - which reflects bullish bets on bullion - fell by $2.2 billion to $12.2 billion for the week ended May 15.
PHYSICAL GOLD BUYING MUTED
Physical gold buying interest in main gold consumer India remained light on Friday, while gold bar premiums in Hong Kong and Singapore were steady from last week as market participants wait for progress in the euro zone's struggle.
But premiums of gold bars in Tokyo rose to as much as $1.50 an ounce above London prices on Friday, the highest level since last March, as investors turned from sellers to buyers during a recent price downturn, dealers said.
CME Group Inc (CME.O), the world's largest commodities exchange, on Thursday cut margins for trading gold and some other contracts, with effect from the close of business on May 29. Margins for trading gold have been lowered by about 21 percent this year.
Margin reductions tend to have a less immediate impact on prices than margin hikes, ANZ Bank said in a note. Nevertheless, the reduction is likely to be mildly supportive going forward.
Among other precious metals, silver was flat at $28.28 an ounce. Spot platinum was up 0.7 percent at $1,422.74 an ounce, while spot palladium was up 1 percent at $588.47 an ounce.
Platinum has underperformed gold recently, with the gold/platinum ratio - which measures the number of platinum ounces needed to buy an ounce of gold - rising to its highest since the end of January at 1.1.
Longer term, the fundamental outlook for both metals should improve significantly, with palladium still looking like a tighter market relative to platinum, Credit Suisse said in a note on Friday.
But a substantial restructuring of the South African production scene in reaction to wafer thin or negative margins is unlikely to emerge before Q4 at the earliest, and neither metal can defy the gravitational pull of the European political and economic disarray or slowing growth in U.S. and Chinese vehicle sales.