Gold fell to its lowest since late August on Thursday after signs that euro zone leaders are committed to keeping Greece in the euro ignited investor appetite for riskier assets at the expense of perceived safe havens, including German debt.
Equities and the euro got an additional boost from the world's largest central banks, including the Federal Reserve, the European Central Bank, the Bank of Japan, the Swiss National Bank and the Bank of England, saying they would reintroduce three-month operations to increase dollar liquidity as the degree of uncertainty has made banks wary of lending to each other.
Spot gold was down 2.1 percent at $1,783.49 an ounce at 1405 GMT, having earlier dipped as low as $1,778.49 and is set for its first monthly decline since June, although it is still one of this year's best-performing commodities, however, up more than 27 percent since January.
Gains in so-called higher risk assets are curbing a further rise. European shares rose on Thursday as investor sentiment was boosted by Wednesday's conference call between France, Germany and Greece. .EU
People don't feel any more confident about the outlook for Europe, but obviously, there must be a bit more positivity for holding riskier assets, said Societe Generale analyst David Wilson.
I still think the general trend for gold is upward, but it's a saw-toothed pattern and at the moment, we're on the downside, he said.
The latest U.S. data showed an above-forecast rise in weekly U.S. jobless claims, and August inflation cooling, along with a surprisingly large contraction in a reading of regional manufacturing, highlighting the weakness in the U.S. economy.
It's the denial stage that's taken hold of all the markets -- (a belief) that everything's going to be fine, the EU and U.S. leaderships can manage to put their economies to rights, said VM Group analyst Carl Firman.
I don't think that is the case, and I think it's only a matter of time before that comes home to roost. The gold price is probably going to benefit from that.
German government bond futures staged their largest one-day fall in six months on signs of more willingness from policymakers to solve Greece's debt crisis, prompting some to trim positions in safe-haven bonds.
French and German leaders told Greece on Wednesday it was vital to implement reforms set under a bailout plan. Patience is wearing thin among euro zone members with Greece's failure to meet fiscal and structural reform targets.
Gold prices have steadied after the extreme volatility seen earlier this month, which saw prices trading in a greater-than-$50 range for five successive trading sessions.
It is clear that the gold market is sorely in need of inspiration here, said UBS analyst Edel Tully in a note.
Short of an intensification or calming of the euro zone debt crisis, or a massive surprise from U.S. data, the gold market will likely have to wait for next week's (Federal Reserve) meeting for fresh impetus.
Metals consultancy GFMS said in a report on Thursday that it expected gold prices to break through $2,000 an ounce by year-end, as recovering investment added to already strong bar, jewelry and official sector buying.
World investment -- which includes activity in the coin and bar, exchange-traded fund, Comex and over-the-counter sectors -- is expected to climb 1 percent this year despite a sharp drop in interest in the first quarter.
On the supply side of the market, a Libyan central bank official last night poured cold water on the idea that the cenbank would sell more of its gold, after 29 tonnes was disposed of in April/May this year.
Silver was down 1.6 percent at $40.01 an ounce, spot platinum was down 1.1 percent at $1,787.49 an ounce, and spot palladium was up 1.0 percent at $722.22 an ounce.
BNP Paribas raised its silver and platinum forecasts and cut its palladium price view for this year and next. It said while higher gold prices were likely to benefit silver and platinum, palladium, the most industrial of the major precious metals, was vulnerable.
Palladium is the only precious metal to have fallen in price in the year to date. Its fundamentals have steadily deteriorated during the year, it said.
We now expect the market to be in surplus in 2011 and into the first half of 2012.