Gold prices cut initial gains to turn lower Tuesday as the U.S. dollar strengthened in choppy trade following disappointing U.S. home sales data and dented sentiment in the bullion market.
Platinum and palladium touched their highest mark in well over a year on expectations that strong December sales from Ford Motor Co. will lift demand. Anticipation of new exchange-traded products in the United States also boosted sentiment.
A lack of follow-through buying from the previous session's rally, which was largely driven by short-covering, dragged bullion prices lower, traders said.
"There was a lot of buying [Monday]as dealers opened new positions in the beginning of the year, but the early rally has fizzled," said Mihir Dange, a Comex gold trader.
Spot gold was at $1,117.65 (U.S.) an ounce at 3:17 p.m. ET, against $1,121 late in New York on Monday. Earlier it touched a high of $1,127.70 an ounce.
U.S. gold futures for February delivery settled up 40 cents at $1,118.70 an ounce on the Comex division of the New York Mercantile Exchange.
Standard Chartered analyst Daniel Smith said he was cautious on the outlook for the metal. "Our view is that the dollar will be more range-bound than it was late last year, and that will make any upward rallies in gold difficult to sustain," he said.
The dollar turned higher in a volatile session after a report showed that U.S. pending home sales fell sharply in December.
On the physical market, gold buying in India, the world's biggest bullion consumer in 2008, continued for a second day on Tuesday as a strong rupee made the metal cheaper for domestic traders, dealers said.
Analysts say there are signs that physical demand is returning as buyers become acclimatized to higher prices. "Reports indicate that jewellery demand is picking up at these levels," said Fairfax analyst John Meyer in a note.
New York's SPDR Gold Trust reported sales on the first trading session of 2010, and its holdings dropped nearly 5 tonnes on Monday from the previous business day.
Silver was at $17.72 an ounce against $17.55 late on Monday in New York. Earlier it hit a peak of $17.85 an ounce, its highest since mid-December.
Platinum hit a 16-month high of $1,535.50 and was last at $1,529.50 an ounce against $1,521, while palladium reached its strongest level since July, 2008, at $424 and was last at $418 against $418.
Ford posted a 33 per cent sales gain for December as U.S. auto sales ended 2009 on an upswing after a tumultuous year that saw GM and Chrysler collapse into bankruptcy and China overtake the United States as the biggest car market.
Investors are favouring the platinum group metals, used mainly in automotive catalysts, partly due to perceptions that a recovery in economic growth will lift car demand.
Many also hope the launch of U.S.-listed ETPs backed by platinum and palladium will open the metals up to a new wave of investment.