Gold drifted lower on Tuesday as the dollar broadly gained ahead of a U.S. Federal Reserve policy meeting and accompanying statement.
The metal held by U.S.-based StreetTRACKS exchange-traded fund, the world's largest gold fund, rose to a new record high of 509.60 tonnes on Monday, indicating long-term sentiment remained positive.
But low trading volumes in the current holiday period exposed gold to sharp price fluctuations, analysts said.
Gold seems to find its equilibrium level in the $650-$700 an ounce range. We still see some upside potential in the medium- to long-term, but that will very much depend on currencies, said Frederic Panizzutti, analyst at MKS Finance.
Anything affecting the dollar should be considered as an important factor and the Fed meeting is definitely one of the factors that could affect the value of the dollar.
Spot gold fell as low as $666.20 an ounce before rising to $668.95/669.55 an ounce by 1356 GMT, still down from $671.05/671.65 late in New York on Monday, when it rose to a one-week high of $676.50.
The dollar strengthened against a basket of major currencies ahead of the Federal Reserve decision on interest rates later in the day. The Fed is widely expected to leave rates on hold at 5.25 percent, so the focus will be firmly on what policymakers say in their statement.
The broad return of risk appetite to financial markets over the past 36 hours -- Wall Street rallied late Monday and European stocks were sharply higher Tuesday -- partly reflects investors' belief policymakers will soothe concerns about the recent turbulence in credit and U.S. mortgage markets.
It looked like gold was going to hold $670, but seems good selling out of the U.S. again. The dollar has also strengthened a little against the euro and a basket of currencies, said a precious metals analyst in London.
Traditionally gold is seen as a hedge against financial and political turmoil, but in recent months it has followed stock and credit markets as investors trimmed their portfolios.
A higher U.S. currency makes dollar-denominated metals more expensive for holders in other currencies, while investors often buy gold as a hedge against oil-led inflation.
We have the subprime issue lurking in the background, and people are waiting to see what will be in the Fed's statement, said Tatsuo Kageyama, an analyst at Kanetsu Asset Management.
He said traders wanted to wait and see if the central bank comments on risks to economic growth from woes in the U.S. credit market before they take new positions.
In other precious metals, silver was up 6 cent at $12.97/13.01 an ounce from late New York level, while palladium
was down $2 at $359/363. Platinum slipped to $1,280/1,284 from $1,292/1,296 an ounce.
Swiss-based miner Xstrata Plc met forecasts with a 47 percent rise in first-half profit and unveiled a $1 billion offer for South Africa's Eland Platinum in a bid to tap booming demand for the metal from Asia.
(Additional reporting by Miho Yoshkawa in Tokyo and Lewa Pardomuan in Singapore))