Gold prices eased a touch on Monday after a sharp rally the previous session, surrendering gains along with the euro and other commodities as a bounce lent to the financial markets by European Union plans to tackle the debt crisis petered out.
Gold surged 3 percent on Friday, its biggest one-day rise since June 1, after euro zone leaders agreed at a summit on measures to cut borrowing costs in Italy and Spain and shore up the region's banks, leading to a broad rally in financial markets.
It has now surrendered some gains, but lingering optimism over the summit's outcome, reflected in gains in stock markets and falling Spanish and Italian bond yields, provided support.
Spot gold was down 0.3 percent at $1,592.50 an ounce at 12:06 SA time, while US gold futures for August delivery were down $11.00 an ounce at $1,593.20.
Prices held just below their 50-day moving average at $1,599 an ounce, having failed to gain traction above $1,600.
“We are staunch believers that gold will remain a risk-on asset for the foreseeable future,” RBS analyst Nikos Kavalis said. “So if we continue to see a more definitive policy response by authorities, gold will continue to benefit.”
“Having said that ... the investment bid will be essential for the price to move up,” he added. “That will be without a doubt linked to continued news flow. This morning we have had a setback across the sector, and gold has not been left out.”
Pressured by strength in the dollar, the metal has moved more closely in line this year with assets seen as higher risk such as stocks than the 'safe havens' it tracked last year including Treasuries, German Bunds, and the US currency.
Among commodities, crude oil and industrial metals prices slipped following weak factory data from Europe and Asian economies including China, the world's top energy consumer.
The euro, which rose nearly 2 percent on Friday, edged a touch lower on Monday as traders questioned the sustainability of its rally.
European stocks hit two-month highs, however, and Spanish and Italian government bond yields fell, suggesting some positive effects of the EU summit were still being felt.
“If spreads between peripheral EU nations narrow with German Bunds, the financial markets may be more confident of the euro rally and by extension ... the gold rally,” HSBC said in a note.
“If this latest euro rally does reverse, euro bears will feel especially reinvigorated as the failure of the euro to hold onto gains even after demonstrably good news from the summit would suggest little underlying enthusiasm for the single currency. Should this occur, the gold market would likely fall.”
Demand for gold from the world's number one bullion consumer, India, fell on Monday as prices rose, with a depreciation in the rupee raising prices for local buyers.
The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, reported a 2.11 tonne outflow on Friday, extending its first quarterly decline in holdings in a year.
ETFs issue securities backed by physical stocks of metal and have proved a popular way to invest in gold since the start of the financial crisis, offering exposure to the underlying metal price without buyers having to store or insure physical bullion.
Money managers cut their net long position in gold futures and options by 20 percent, the first drop in five weeks, as a lack of fresh monetary stimulus by the US Federal Reserve prompted some investors to lessen bullish bets.
Among other precious metals, silver was down 0.4 percent at $27.38 an ounce. Spot platinum was down 0.6 percent at $1,433.75 an ounce, while spot palladium was down 1 percent at $572.50 an ounce.
The platinum/palladium ratio, which measures the number of palladium ounces needed to buy an ounce of platinum, reached its highest in 2-1/2 months on Monday at 2.49, as platinum outperformed.
It is seen as more vulnerable than other precious metals to supply issues as costs rise and production falls in main producer South Africa.
Anglo American Platinum, the world's top platinum producer, warned on Monday its first-half earnings would fall more than 20 percent, hit by lower sales and falling prices. - Reuters