Gold prices steadied in Europe on Wednesday as the metal's slide to a seven-week low in the previous session prompted buying of physical stocks of the precious metal.
A persistently firmer tone to the dollar, which hit its highest level since early September versus the euro on Tuesday, is limiting further gains, however.
Spot gold was bid at $1,085.20 an ounce at 4:23 a.m. EST, against $1,083.55 late in New York on Tuesday.
Afshin Nabavi, head of trading at MKS Finance, said many speculative investors were getting out of the market in the run-up to year-end, with the thinness of trade exaggerating any price moves. He said 2010 could bring a recovery, however.
"Selling seems to be coming from specs liquidating their positions, and if it hadn't been for physical demand, the market would have been much, much lower," he said.
"It is very difficult to have an opinion for the next few days, but I remain positive toward the price of gold in the coming year. Once everyone is back in their seats, we will see prices head back toward where they were earlier this month."
Spot gold rose to an all-time high of $1,226.10 an ounce at the beginning of December.
The dollar hit a two-month peak on the yen in Asia on Wednesday and remained firm against the euro due to upbeat U.S. economic news and the steepest yield curve on record.
Strength in the U.S. unit limits gold's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.
Other commodities also held firm on Wednesday, with oil prices holding near $75 a barrel after industry data showed a sharp drawdown in U.S. crude stocks and an unexpected fall in gasoline supply.
Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation.
Gold prices are eyeing support around $1,060-1,065 area, traders said, having shed 11.5 percent already since early December's record high. If this breaks, it could lead to a further correction, analysts said.
"In the run-up to year-end, we expect gold to see further pockets of long liquidation, potentially pulling back to the $1,050 area," said James Moore, an analyst at TheBullionDesk.com.
In investment news, the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings stood at 1,132.708 metric tons as of December 22, unchanged from the previous business day.
London's ETF Securities said holdings of its gold-backed exchange-traded products declined half a percent to 7.778 million ounces on Tuesday from 7.821 million ounces the day before.
Meanwhile India's spot gold prices fell for a second consecutive session on Wednesday as buyers stayed away expecting prices to fall further, dealers said. India was the world's biggest bullion consumer last year.
"Most buyers expect prices to come down further... they will be interested when prices stay below 16,500 (rupees per 10 grammes)," said a dealer with a private bank based in Mumbai.
U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange edged down 60 cents to $1,086.10 an ounce.
Among other precious metals, spot silver was bid at $16.97 an ounce against $16.96. Platinum was at $1,392.50 an ounce against $1,393, while palladium was at $352 against $352.50.
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