Gold prices held steady on Wednesday, shrugging off the downgrade of Spain's sovereign credit rating, as investors wait for clarity on Europe's plans to tackle the debt crisis at this weekend's European Union summit.
Moody's cut Spain's sovereign ratings by two notches, citing high levels of debt in the banking system and corporate sector, and also cast doubt on France's triple-A rating earlier this week.
France and Germany were reported to have reached an agreement to boost a euro zone financial rescue fund to two trillion euros ($2.76 trillion), as European leaders have been pressured to come up with a definitive solution to the debt crisis at the meeting this weekend.
Gold has nowhere to go unless there is clarity on what Europe wants to do, said Ronald Leung, a physical dealer at Lee Cheong Gold Dealers in Hong Kong.
Gold usually benefits from economic and political turmoil given its safe-haven appeal, but has moved in tandem with risk assets in recent weeks. Spot gold has dropped for five out of the last seven trading sessions.
Leung and other dealers said the price dip in the previous session to below $1,630 attracted a wave of physical buying, but demand eased as prices rebound.
Spot gold was little changed at $1,657.89 an ounce by 0633 GMT, recovering from $1,626.34 hit in the previous session, its lowest in nearly two weeks.
U.S. gold gained 0.4 percent to $1,659.90.
Technical analysis suggested that spot gold has turned neutral as the sharp rise from Tuesday's trough of $1,626.34 has violated a short-term downtrend, said Reuters market analyst Wang Tao.
Spot gold has been trading in a range roughly between $1,600 and $1,700 this month. Open interest in U.S. gold futures and options stood near its lowest level since late July, as investment interest languished, data from the U.S. futures regulator showed.
At the moment it's just a traders' market rather than an investors' market, said a Singapore-based trader, It goes 20 bucks one way and 20 bucks the other way, then we are unchanged. It lacks a main driver.
The difficulty in funding and market turbulence caused by the euro zone's debt crisis have forced investors to the sidelines.
Effectual interest rates have to be lower and the market has to turn stable -- these two are needed to get gold to return to the upward trending market that everyone loved so much, he said.
The United States pushed through its toughest measures yet to curtail speculation in commodity markets in a tight vote on Tuesday, likely shifting the focus of a fierce four-year debate from the regulators to the courts.
It is likely to affect the amplitude of the swings in prices, and drive business away from COMEX to other forums such as OTC (over-the-counter), MCX (Multi Commodity Exchange), or Hong Kong, said David Thurtell, a Citigroup analyst.