GOLD edged higher on Tuesday as the euro held steady against the dollar, but gains were muted ahead of this week's European Central Bank (ECB) meeting as investors weighed up the prospects of definite action to tackle the eurozone debt crisis.
The metal rose through $1625 an ounce for the first time since mid-June on Friday and the euro hit a three-week high against the dollar after ECB chief Mario Draghi pledged to do anything necessary to protect the single currency from collapse.
But that surge has shown signs of unwinding as investors weighed up the prospect of Mr Draghi disappointing the markets.
While the ECB has raised expectations of some kind of announcement on the bloc's burgeoning debt crisis, concrete action may still be weeks away.
"Market expectations regarding additional monetary policy measures are too highly optimistic," Bayram Dincer, an analyst at LGT Capital Management, said.
"The market interpretation of those signals from Draghi's wording was for (action to be announced at) the Thursday ECB meeting, which is too early in my view," he added. "The negative price dynamic post-ECB could range between $50-$60, equivalent to the price gains after Mr Draghi's comment. But we expect good support at the $1560 price level."
Spot gold was up 0,2% at $1623,31 an ounce at 9.24am GMT, while US gold futures for August delivery were up $2,60 an ounce at $1622,30.
The euro held steady against the dollar on Tuesday, but stayed off three-week highs as traders tempered expectations for the ECB meeting. European shares opened lower and German Bund futures extended gains, while other commodities like copper and crude oil dipped.
Gold priced in euros rose 0,2%, meanwhile, to 1323,66 euros an ounce, close to Monday's five-month high. It has outperformed spot prices this month, up 4,9% so far in July, against a 3% rise in dollar gold.
Ahead of the ECB meet, attention is focused on the Federal Reserve, which begins a two-day policy meeting later on Tuesday.
"Some of the tools the Fed could use (to stimulate growth) include extending the use of quantitative easing, extending (its bond-buying programme) 'Operation Twist', or employing new tools such as cutting interest on reserves, or extending interest rate guidance," HSBC said in a note.
"Traditionally, gold prices closely follow US monetary policy indications." However, analysts said immediate action from the Fed was unlikely.
Swiss bank UBS on Tuesday lifted its one-month gold forecast to $1700 an ounce from $1550, citing expectations the Fed's Jackson Hole meeting in August could be significant for policy expectations ahead of the September FOMC meeting.
It also lifted its three-month forecast to $1750 an ounce from $1600, which it said takes into account the US elections in November and the looming US 'fiscal cliff', when the expiry of some tax cuts will coincide with planned spending reductions.
Interest in physical gold was lacklustre, with demand from major consumer India crimped by higher prices and the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, on track for its biggest monthly outflow this year in July.
Holdings of the exchange-traded products tracked by Reuters, which include the SPDR along with funds operated by ETF Securities and Zurich Kantonal Bank, are set to decline for a third straight month in July, down around 3 tons.
Sales of gold and silver American Eagle coins from the US Mint were also set to hit their lowest since April, at 30500 ounces and 2,278-million ounces respectively. That would represent the weakest July sales of gold American Eagles in five years.
Among other precious metals, silver was up 0,6% at $28,30 an ounce, while platinum was up 0,5% at $1417,74 an ounce and spot palladium was up 0,8% at $588,25 an ounce.