Gold tumbled nearly 2 percent to a one-week low at $1,385 an ounce on Tuesday as investors opted instead for assets seen as higher risk, like stocks, the euro and some industrial commodities.
Expectations that the eurozone debt crisis could worsen, concerns over the potential for inflation in developing economies and an increased focus on the U.S. deficit are set to maintain investment demand for gold, however, analysts said.
Spot gold was bid at $1,388.39 an ounce at 1501 GMT, against $1,414.00 late in New York on Monday. U.S. gold futures for February delivery fell $33.90 an ounce to $1,389.00.
The metal reached its highest in nearly a month on Monday at $1,423.57 an ounce, but struggled to hold gains after purchasing managers' indexes showed manufacturing growth quickened in the United States and Europe.
"The PMI data in particular is suggesting things are getting better rather than worse," Macquarie analyst Hayden Atkins said. "You are probably better off being exposed to copper when global industrial production is starting to ramp up than gold."
"Maybe gold will take a bit of a back seat from a performance point of view for the next month or so," he added.
On the currency markets, the euro rose against the dollar, yen and the Swiss franc on Tuesday after upbeat euro zone and U.S. economic data boosted risk appetite.
Bund futures meanwhile fell into negative territory as industrial commodities and stocks continued to benefit from an improved economic outlook and growing investor risk appetite, limiting demand for low-yielding government debt.
Among other commodities, copper hit a series of record highs and other base metals rose, though oil retreated after nearing its highest in over two years. Gains in industrial commodities helped lift stocks to a one-week high.
"Pressure (on gold) is expected to return over the next week or two based on our expectation for a reversal in oil prices, gains in the stock market and general stability in the dollar," MF Global said in a note.
RISK APPETITE FIRM
While risk appetite was firm in the early trading days of 2011, plenty of safe-haven support remains for gold, as concerns persist over debt levels in the eurozone and over the outlook for U.S. growth.
"The majority of factors for gold are very positive," said Credit Suisse precious metals analyst Tom Kendall.
"If you were looking for negatives, you would have to say the lack of any sizable dehedging program this year from the miners would be one that you could pick up on, but from the investment community, sentiment is still very much bullish towards gold."
But gold demand in the world's biggest bullion consumer, India, was weak on Tuesday as the country's wedding season neared its end.
"There is less demand as prices are really volatile," said one dealer. "Some stagnation is coming."
Among other precious metals, spot silver slid to $30.00 an ounce from $30.66 an ounce, retreating from the previous session's peak of $31.22, its highest since 1980.
Platinum was at $1,751.99 an ounce against $1,766, while palladium was at $782.47 against $789.97.
Both platinum group metals, which are primarily used in auto catalysts, are expected to build on last year's gains in 2011 as demand for cars continues to rise, particularly in the key Chinese market.
Beijing's decision to limit new car registrations in the capital, announced in late December, is expected to cool the country's fast-expanding auto sector, however.
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