Gold fell back from six-week highs on Tuesday after the euro came under pressure following the breakdown of talks between European finance ministers and Greece's private creditors.
In Europe, talks between euro zone finance ministers and private creditors over the restructuring of Greece's debt broke down, snuffing out a recovery rally in the euro and denting risk-related assets such as equities.
The Chinese Lunar New Year holiday meant activity in the world's second-largest consumer of gold was absent, while activity was muted in top consumer India, where import duties on gold were nearly doubled last week.
The euro's earlier rally to three-week highs against the dollar and to four-week highs against sterling on the back of forecast-beating service and manufacturing sector activity data acted as a headwind to the gold price, which often moves in lockstep with the currency.
Gold's correlation to the euro fell to its least positive in two months, in sharp contrast to early January, when this relationship was at its most positive in two years.
Spot gold was last down 0.4 percent on the day at $1,670.00 an ounce at 12:23 SA time.
“Gold is at a crossroads, because ... we don't know if it will break towards $1,700 or back towards $1,650,” Afshin Nabavi, head of trading at MKS Finance said, of gold's medium-term prospects.
“(Investor demand) is something that has been missing all through January. I think the price movement in December sort of shell-shocked a lot of investors and they will not come back into the market until they see some kind of confirmation,” he said.
Gold fell by more than 10 percent in December, marking its second-largest monthly decline of 2011 as an investor preference for cash over most other assets in the run-up to the end of the year took its toll on the bullion price.
Adding an additional layer of support for gold was a report on Monday from the World Gold Council reiterating its expectation for central bank purchases of the metal to hit another record in 2011.
“The outlook for central bank gold purchases remains positive for this year, based on the likelihood that emerging markets central banks will continue to diversify away from the US dollar,” James Steel, HSBC analyst, said in a note.
“Since US dollar foreign exchange holdings are already at record levels in many countries, we believe these nations will seek to increase gold reserves, in a bid to diversify their USD-laden reserves,” he said. “While we do not expect official sector activity to move the market near term, we regard central bank purchases as a bulwark of the long-run gold rally.”
Aside from European manufacturing and service sector activity, the US Federal Reserve starts a two-day meeting that is expected to yield policymakers' forecasts for both the economy and for interest rates in the longer term.
A Reuters poll of leading Wall Street economists shows most expect the Fed to signal its policymakers do not expect to start raising US rates until the first half of 2014, more than five years after cutting them to zero.
A protracted period of low US interest rates is generally favourable for gold, which tends to gain more of a competitive advantage against yield-bearing assets such as stocks or bonds when monetary policy is very loose.
In other precious metals, silver was down 0.5 percent on the day at $32.16 an ounce, yet remains the strongest performing precious metal so far in January, with a 16 percent gain, compared with a 6.7 percent gain in gold and a 4.0 percent gain in laggard palladium.
Palladium trailed the rest of the precious complex on Tuesday, falling 1.3 percent on the day to $676.35 an ounce, while platinum lost 1.0 percent to trade at $1,543.50 an ounce,
The platinum price has risen by 11 percent this month, driven largely by concerns about possible supply disruptions from power restrictions in top miner South Africa and from industrial action underway at two key plants.
Workers at world number two producer Impala Platinum's operations near Rustenberg in South Africa downed tools late last week in protest over wages, which the company said would cost it 3,000 ounces of platinum a day in lost production, while employees at its Zimplats unit in Zimbabwe also went on strike. - Reuters