Gold Eases 1% Ahead of Slovak Vote on European Bailout Fund

Gold eased 1 percent on Tuesday, giving up some of the previous day's gains, as stocks and the euro were pressured by waning optimism over a new plan to tackle euro zone debt, and ahead of a vote in Slovakia to ratify changes to the bloc's rescue fund.

The precious metal is still seeing good physical demand at lower prices, particularly from Asia, but some selling has also been seen above $1,670 an ounce, analysts said.

Spot gold was down 1 percent at $1,659.09 an ounce at 0928 GMT. The metal rose more than 2 percent on Monday, helped by a retreat in the dollar, weakness in which, among other things, makes gold cheaper for other currency holders.

Intraday, gold most of the time tracks currency moves. We're seeing the euro under a bit of pressure today, which is dragging down gold, said Standard Bank analyst Walter de Wet.

But we think if you take a six to 12 month view, gold will continue to trade inversely with risk, especially if it is driven by credit issues. If the solution seems biased toward creating more liquidity, that should push gold higher.

The euro fell 0.5 percent versus the dollar on Tuesday, extending losses after Slovak Prime Minister Iveta Radicova said she will tie a ratification vote on the expansion of the euro zone's EFSF rescue fund slated for later in the day to a confidence vote on her government.

Three of the four parties in the right-of-center government want to push through the mechanism aimed at preventing the Greek debt crisis from spiraling out of control but a fourth has threatened to vote against it.

Slovakia is the last member the 17-member bloc yet to vote on a deal agreed by its leaders in July.

Markets were also wary over a pledge by French and German leaders to unveil a multi-faceted plan by early November to address the debt crisis, which lifted markets on Monday.

Yesterday's (rise) in the single currency has all the hallmarks of a helium-induced rally, said Michael Hewson, an analyst at CMC Markets.

(Its) effects will soon wear off once the markets realize that, for all the optimism yesterday, Merkel and Sarkozy will more than likely be unable to deliver, as on so many previous occasions, what they promised they would.

U.S. gold futures for December delivery were down $9.60 an ounce at $1,661.20.

PHYSICAL DEMAND LENDS SUPPORT

Demand for physical gold, which picked up considerably as prices fell more than 20 percent from last month's record highs above $1,920 an ounce, is continuing to support the precious metal, with Asian buyers particularly active in the market.

Premiums for gold bars in Hong Kong stood at around $3 an ounce, their highest level since at least February, while the premium in Tokyo held at 50 cents, dealers said.

Seasonal buying, particularly in main consumer India ahead of the Diwali festival of lights on October 26, should underpin gold prices, Swiss bank UBS said in a note.

Over the last couple of years, the two weeks leading to Diwali brought overall buying that was consistently above average - even twice the weekly average - despite rising prices, it said.

Although day-to-day volumes will naturally show some degree of price sensitivity, as they have in previous years, this seasonal demand is an important underlying support for gold, as any dip in prices will likely encourage a buying spree.

Doubts remained over the metal's ability to recreate the stellar gains recorded earlier in the year, however. Prices remain up 17 percent since the end of December despite September's retracement, their sharpest monthly drop in nearly three years.

Societe Generale said it remains broadly bullish on the outlook for gold despite the recent retrenchment in its prices, but lowered its 2012 price forecast for the metal.

The bank now expects the 2012 gold price to average $2,175 per ounce, down from its previous outlook of $2,275 per ounce. The precious metal has averaged around $1,540 an ounce so far this year, Reuters data showed.

Among other precious metals, silver was down 1.5 percent at $31.60 an ounce. The gold:silver ratio -- the number of silver ounces needed to buy an ounce of gold -- steadied at around 52.5 on Tuesday, off last week's high of 54.6.

Spot platinum was down 0.3 percent at $1,512.50 an ounce, while spot palladium was down 2.2 percent at $596.97 an ounce.