Gold dipped on Thursday after better-than-expected U.S. manufacturing data pushed equities into positive territory, with investors weighing up the prospect of a fresh round of quantitative easing from the U.S. Federal Reserve.
The metal posted its strongest monthly gain in August since November 2009 as a run of soft economic data fueled speculation the Fed would print more money to shore up the flagging economy. Trade was volatile in the absence of clear direction.
Thursday's U.S. manufacturing reading took the heat out of recession fears, however. Bund futures pared gains after the report, while the dollar extended gains against the yen.
Spot gold eased 0.2 percent to $1,819.49 an ounce at 1427 GMT, having earlier risen as high as $1,829.90.
U.S. stocks turned higher on Thursday after the key ISM survey of the factory sector showed activity grew in August. European stocks pared early losses to turn higher. .N .EU
Gold might slip even further since the ISM at 50.6 reduces overall risk aversion and at the same time the possibility of QE3, said Commerzbank analyst Eugen Weinberg.
Investors entered September in a bearish mood, with Reuters asset allocation polls on Wednesday showing leading fund companies were holding less than 50 percent of their mixed-asset portfolios in stocks.
The market I think is betting on further policy support for the economy, which would be positive for gold, said Credit Agricole analyst Robin Bhar.
There is a lot of uncertainty out there, and all the drivers for gold -- the financial uncertainties, the economic imbalances, the debt burdens, the currency debasement, the deflation/inflation debate -- are still positive in the short to medium term.
These factors have sparked a 29 percent rise in gold prices this year, driving the precious metal to a record $1,911.46 an ounce early last week before its sharp correction.
U.S. gold futures for August delivery were down $9.80 an ounce at $1,821.90.
Investors are now awaiting Friday's non-farm payrolls report, a key barometer of economic conditions. Weak data would make further U.S. easing more likely.
Earlier on Thursday non-farm productivity numbers for the second quarter came in weaker than expected, while new U.S. claims for unemployment benefits fell as expected last week. U.S. Treasuries rose as the data stoked fears about a recession.
Among other commodities, oil prices turned higher after the supportive U.S. manufacturing data, while base metal fell on the firmer dollar and a drop in Chinese export orders.
Silver prices fell 0.5 percent at $41.28 an ounce. Data released on Wednesday showed a rise in Mexican silver output in June of just over 300,000 kg.
Mexico has now overtaken Peru as the world's largest silver producer, HSBC said.
According to the executive director of the Mexican Mining Chamber, Sergio Almazan, several new large silver mine projects will reinforce Mexico's position as a leading silver producer, the bank said in a note.
Unlike gold and the PGMs, silver mine production has been robust, with most producers increasing output. We expect this to help restrain silver gains and to play a role in widening the silver-gold ratio back to 50:1 from its current 44:1.
Elsewhere, spot platinum was flat at $1,838.99 an ounce, while spot palladium rose 0.3 percent to $780.47 an ounce.
Palladium was one of the weakest performers among the metals in August, falling 7.3 percent versus a 1.6 percent rise in platinum prices and larger gains in gold and silver.
Swiss bank UBS said in a note that it expected the auto-catalyst metal to benefit from stronger growth in emerging market car sales. The pick-up in EM auto sales relative to developed markets offers fundamental support for palladium down the road, it said.
(Reporting by Jan Harvey, editing by Keiron Henderson)