Gold rose on Wednesday on a combination of increased inflationary pressure and ideas this week's Franco-German proposals will not solve the euro zone debt crisis.
The metals third straight rise came as a report showed U.S. core producer prices rose at their fastest pace in six months in July. Also encouraging bullion buying were remarks by Venezuelan President Hugo Chavez, who said on State television that he plans to nationalize the gold industry to pad the country's international reserves.
Analysts said that bullion is vulnerable for a sharp pullback following a rally of as much as 4 percent in the last two sessions.
"Gold looks like it's overbought based on various technical-momentum indicators," said Leo Larkin, metals equity analyst at Standard & Poor's.
Larkin said that gold could sharply retreat to between $1,450 and $1,550 in the coming months.
Spot gold was up 0.2 percent at $1,789.49 ounce by 3:10 PM EDT, about $20 off last week's record $1,813.
U.S. gold futures for December delivery settled up $8.80 at $1,793.80 an ounce. Trading volume was lower than Tuesday's and sharply below last week's pace when the metal rose to records amid high volatility.
Silver was up 1.2 percent at $40.34 an ounce.
The U.S. Labor Department said its seasonally adjusted index for prices paid at the farm and factory gate, excluding food and energy, or core PPI, rose 0.4 percent -- the largest increase since January.
"The recent U.S. PPI and price data elsewhere are clear indications that inflation is tracking higher, which certainly is another plus for the gold market," said Bill O'Neill, partner of commodity investment firm LOGIC Advisors.
Market anxiety supported safe-haven bids after Franco-German proposals to boost fiscal convergence in the euro zone got a cool response from other member states and failed to convince investors the bloc's debt crisis was closer to being solved.
Analysts, however, said that gold is due for a pullback after prices surged around $300 in the past 1.5 months.
The relative strength index shows that, technically, bullion is well into the overbought territory, and the metal appears to be forming a climax top on weekly charts, suggested a correction is possible.
VENEZUELAN GOLD NATIONALIZATION
Bullion's response was limited after Venezuela's President Hugo Chavez said he plans to nationalize the country's gold sector, including extraction and processing, and use the output to boost the country's international reserves.
"I don't think that's new news. For some time, he has been nationalizing a whole host of industries...I don't think there's a lot of gold reserves in Venezuela," said S&P's Larkin.
Even though Venezuela has some of Latin America's largest gold deposits in its south, the country's annual gold output is equivalent to 0.2 percent of global world bullion production.
The gold market has largely ignored market fundamentals as bullion has been driven by strong investment demand amid stock market turmoil and worries over U.S. and European debt levels.
Among platinum group metals, platinum was up 1.2 percent at $1,832.74 an ounce, supported by inflows into ETFs and against a backdrop of threatened strikes in South Africa, the world's largest producer of the metal.
Palladium rose 2.4 percent to $770.70 an ounce, tracking platinum.