Gold fell on Friday, giving up earlier gains, as caution hit financial markets ahead of the results of European bank stress tests, with renewed strength in the dollar helping pull the metal back from $1,200 an ounce.
The results of stress tests are due at 1600 GMT.
Spot gold was bid at $1,190.70 an ounce at 1404 GMT, against $1,195.35 late in New York on Thursday. Earlier it climbed as high as $1,203.45. U.S. gold futures for August delivery fell $4.50 to $1,191.10.
The euro fell to a session low below $1.28 against the dollar as investors grew more cautious ahead of the results of European banks' stress tests and as U.S. equities opened lower.
Historically, strength in the U.S. unit has weighed on gold prices, as it reduces gold's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.
The usual relationship between the two weakened at the start of the year as both benefited from risk aversion during the sovereign debt crisis, but has since shown signs of re-emerging.
As is typical with gold, relationships are changing, said Societe Generale analyst David Wilson. We've gone from a positive correlation between gold and the dollar - both being safe havens - to a negative one in the space of a few days.
European shares gave up early gains in mid-afternoon trade, while U.S. stocks opened lower as concerns over the outcome of the bank stress tests knocked sentiment. .EU .N
Expectations are that up to 10 lenders will fail the exam and have to raise capital.
PHYSICAL GOLD DEMAND SOFTENS
Among other commodities, oil prices fell from an 11-week high to near $79 amid uncertainty over the stress tests, while copper prices were little changed.
On the physical gold markets, buyers in India, the world's largest bullion consumer last year, stayed away for a second day in anticipation of further price falls.
Demand for physical gold investment products including ETFs, coins and bars has softened as concerns over financial market stability have receded, analysts said.
Holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, fell more than 6 tons to a six-week low of 1,302.046 tons on Thursday.
Longer term, more upside is still seen in the spot price. Swiss bank UBS revised up its 2010 gold price forecast to $1,205 an ounce from $1,129 on Friday, and its 2011 price view to $1,295 from $1,250.
We believe that ongoing pressure on sovereign debt markets, combined with persistent concern over private sector credit contraction will raise the specter of debt monetization repeatedly over the next few years, the bank said in a note.
A Reuters poll of 55 analysts, traders and fund managers released earlier this week showed an average forecast of $1,197 an ounce in 2010, rising to $1,228 next year.
Among other precious metals, silver was flat at $18.07 an ounce, while platinum was at $1,533.50 an ounce versus $1,521.10 and palladium at $457 against $454.
(Editing by James Jukwey)