Gold trimmed losses on Thursday on a weaker dollar and as hopes that Italy will soon form a new government to carry out reforms and tackle the deepening debt crisis gave investors a little more confidence to bet on commodities.
In the last two days, a deepening euro zone debt crisis, with fears over a disordered bankruptcy in Greece and Italy's borrowing costs in dangerous territory, prompted financial players to sell commodities including gold.
News that Mario Monti, a former European Commissioner and respected international figure, had emerged on Thursday as favorite to replace Silvio Berlusconi and form a new government to stave off a run on Italian bonds boosted investors' confidence and lifted gold prices.
Spot gold hit a daily low at $1,753.39 before paring some losses to trade at $1,765.09 an ounce by 1058 GMT (5:58 a.m. ET), 0.25 percent down from $1,769.54 late in New York.
There was a rebound due to the weaker dollar and the Italian news but will the optimism hold? I don't know, said analyst Andrey Kryuchenkov of VTB Capital.
Broader trading is jittery but gold is more supported. If the dollar weakens and the broader market is more risk-friendly gold will track it. If uncertainty remains, gold will be supported by safe haven buying.
Supporting gold, the dollar softened against a basket of currencies. .DXY
A weaker U.S. currency makes dollar-priced commodities such as precious metals more affordable for holders of other units.
Some however feared that a deepening euro zone crisis will continue to weigh on gold.
Looking at what is going on in Europe a further round of liquidation across commodities, including gold, is possible, said Credit Suisse analyst Tom Kendall.
It's not the fact that people are staying away from gold as a safe haven asset but short-term players sell across market classes when they see the market shifting.
Italy, now firmly at the heart of the euro zone crisis, paid a 6.087 percent yield, the most in 14 years, at a one-year debt auction on Thursday but placed the full planned amount of 5 billion euros.
In the meantime, Greek political leaders resumed their search for a deal on a new prime minister after one agreement collapsed. [ID:nL6E7MA0NM]
Emphasising worries, the European Commission said the euro zone economic growth will slow sharply next year as weak confidence undermines investment and consumption and tighter fiscal policies reduce domestic demand.
Gold fundamentals however, remained supportive.
New York's SPDR Gold Trust, the biggest gold-backed ETF, said its holdings rose 0.24 percent on Wednesday from Tuesday, while that of the largest silver-backed ETF, New York's iShares Silver Trust gained 0.26 percent.
Physical gold demand is strong in some parts of Europe, Kendall said.
Other precious metals such as platinum and palladium however are suffering with what is going on in the auto sector; floods in Thailand have caused serious disruptions in Asia. There is no real sense that we'll have a turning point for PGMs (platinum group metals) for the moment.
Other precious metals all lost some ground.
Silver fell 1.15 percent to $33.67 an ounce while platinum slipped 0.26 percent to $1,621.50 an ounce and palladium lost 0.66 percent to $640.22 per ounce.