Gold prices retreated more than 1 percent from record highs on Tuesday 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 0.8 percent at $1,881.40 an ounce at 1103 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 Sept. 1999.
It rallied sharply as stock markets were battered last week by concerns over the strength of the U.S. economy and stability of the European banking sector, breaking above $1,900 an ounce on talk that further U.S. monetary easing may be announced.
But it was unable to retain those 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.
The hike in SGE margin requirements is also curbing 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 caution that the risk of CME margin hikes is rising; the SGE announced margin hikes overnight for its forward contract, said UBS in a note.
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.
FRESH EASING EYED
Fresh gains in equity markets are pointing to a pick-up in risk appetite, while cyclical commodities like industrial metals benefited from firm Chinese factory data and oil rose on the back of ongoing fighting in Libya.
German government bonds, which like gold are seen as a safe haven asset, also retreated from record highs.
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 determinedly 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.
St. Louis Fed President James Bullard told Japan's Nikkei newspaper that the Fed could buy more bonds or take other action if the economy weakens, though the timing is not yet right for the move.
Among other precious metals, silver was down 1.9 percent at $42.90 an ounce, spot platinum was down 0.5 percent at $1,889.50 an ounce, and spot palladium was up 0.2 percent at $759.50 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 encourages more substitution in the jewellery industry, analysts said.