Gold slipped on Friday despite gains in equities as investors took to the sidelines before the release of European bank stress test results, which seek to restore confidence in the euro zone banking sector.
Major listed lenders are expected to pass, while the tests may show the biggest problems lie with smaller, mainly unlisted players like Germany's Landesbanks and Spain's cajas.
Spot gold fell 95 cents to $1,194.40 an ounce by 0238 GMT after rising as high as $1,200.10 on Thursday as strong corporate earnings and rallies in equities spurred buying.
Bullion roared to a lifetime high at $1,264.90 in late June on fears the euro zone debt crisis was spreading and the U.S. economy was slowing. Gold may retrace if the stress test shows broadly positive results, though some traders suggest the metal's safe-haven appeal will remain largely intact on an uncertain global economic outlook.
If it's good, I am not totally convinced that gold would sell off particularly. It may fall back it down into the $1,180s, but I can't really at this stage see why that would cause it to go much lower, said Darren Heathcote, head of trading at Investec Australia.
But on the other hand, I still see the potential for it to go higher if it is a bad result. I feel we are going to be reasonably neutral.
U.S. gold futures for August delivery fell $1.2 to $1,194.4 an ounce ahead of the stress test results, which will also reveal holdings of government debt owned by European banks.
Jewellers were on the sidelines, with price still hovering near $1,200 despite a correction. The market is dead and we see light selling from Thailand, said a physical dealer in Singapore.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD.P), said its holdings fell to 1,302.046 tons by July 22 from 1,308.128 on July 20. The holdings hit a record at 1,320.436 tons on June 29.
Japan's Nikkei average rose more than 1 percent on Friday, poised to snap a five-day losing streak, as U.S. stocks jumped after earnings from economic bellwethers 3M, UPS and Caterpillar shed some of their fears about the strength of the recovery. .T .N
The euro steadied against the dollar, retaining gains made the previous day on strong euro zone data and U.S. corporate earnings, as investors await the bank stress test results.
I think if the results are good, the Dow will go up while gold will initially track the euro higher before falling again. I guess movements in the dollar will dominate the trade for the time being, said a dealer in Hong Kong.
Long-term sentiment is still bullish, unless ETF holdings keep falling. If the holdings fall below 1,300 tons, then it's alarming. People will get rid of gold and buy shares.
Oil jumped more than 3 percent to a 11-week high above $79 a barrel on Thursday as a potential tropical storm threatened energy installations in the Gulf of Mexico and strong earnings boosted investor sentiment.
(Editing by Ed Lane)