Gold held near $1,160 an ounce in Europe on Wednesday, steadying after hitting three-month lows the day before, helped by a degree of investor nervousness over the U.S. economy and by strong demand from top consumer India.
As a lot of the fear surrounding the euro zone debt crisis recedes and recent upbeat earnings allay some concern about the outlook for the global economy, gold is likely to encounter more weakness, especially after breaking key technical barriers.
Spot gold was bid at $1,158.75 an ounce at 1408 GMT (10:08 a.m. ET), against $1,159.65 late in New York on Tuesday. U.S. gold futures for August delivery fell $0.20 an ounce to $1,157.70.
Prices fell nearly 2 percent on Tuesday as selling of commodities in the wake of weak U.S. consumer confidence data pushed the metal through key technical support levels.
For now, the metal looks very bearish technically and to be honest, all these moves since yesterday are heavily technically driven, said Standard Bank analyst Walter de Wet.
I think it is going to fall more, but longer term, we still see the bull market intact. Underlying, the same issues that have pushed gold higher still remain, he added.
After the release of the European bank stress tests, a lot of investor unease over the resilience of the European banking system has subsided, but patchy U.S. data has fed concern that growth in the world's largest economy could falter.
U.S. stocks opened lower after an unexpected fall in durable goods orders in June and Boeing Co delivered a profit outlook that fell below Wall Street's consensus forecast.
Commerzbank analyst Daniel Briesemann said despite the metal's slight recovery this morning, diversification into other assets, seasonal demand weakness and a tendency toward liquidation of long positions are all still pressuring prices.
There has been a massive increase in risk appetite among market participants, Briesemann said.
We see money shifting away from safe haven assets like gold to riskier assets like equities and oil.
European banking shares were one of the main gainers on the European stock market, rallying after strong corporate earnings and after the new Basel III capital rules proved less stringent.
Coming up later in the day is the U.S. Federal Reserve's Beige Book, which offers anecdotal evidence of the strength of the economy in each of the central bank's districts.
From a technical perspective, gold prices are looking vulnerable after breaking through support in the $1,175-1,180 an ounce area, analysts said.
Taking a closer look at the price action from the June 21 highs (near) $1,265, the decline can best be described as corrective... with downside targets seen to the 200 day average, now $1,147, said Barclays Capital in a note.
It said a decline to near $1,114 was likely to be the worst case scenario. Into here, we look for renewed signs of basing before a return to trend, it added.
While the risk of further losses remains, analysts said gold should be supported by re-emergent physical demand at lower prices. Traders in India, the world's biggest gold consumer, said buying was picking up as the metal became more affordable.
UBS also said in a note that its gold sales to India on Tuesday matched the second highest this year.
Indian and physical demand from wider hubs has helped to provide a price floor in July, the Swiss bank said.
UBS sales to India in July are five times greater than June and with the expectation that physical demand will persist until the end of the month, July will post the best month for Indian physical demand this year, it added.
A Reuters poll of 19 analysts and traders showed Indian spot gold prices are expected to recover to 18,050 rupees per 10 grams by the end of this quarter. Prices hit a 10-week low near 17,700 rupees earlier on Wednesday.
Among other precious metals, spot silver was at $17.40 an ounce against $17.61, spot platinum was at $1,530.55 an ounce against $1,527.15, and spot palladium was at $465.50 versus $464.85.
(Editing by Alison Birrane)