Gold dropped below $1,100 (U.S.) an ounce Tuesday, snapping a three-session winning streak as a resurgent U.S. dollar dampened bullion's appeal as a hedge against paper currency depreciation.
A dollar rally driven by signs of improvement in the U.S. economy and sovereign credit worries in the euro zone dragged gold more than $100 below its record high of $1,226.10 reached on Dec. 3.
"It's all predominantly dollar-related at this particular point," said Frank McGhee, head precious metals trader at Integrated Brokerage Services. "The gold market should stabilize and I wouldn't be surprised to see a short-covering rally."
Mr. McGhee said that gold could still come under pressure in early 2010, but he expected the U.S. currency to eventually decline due to weak fundamentals.
Spot gold was at $1,096.90 an ounce by 2:51 p.m. ET, against $1,105.60 an ounce late in New York on Tuesday. Bullion had tumbled to a seven-week low of $1,074.10 an ounce last week before the holiday break.
U.S. gold futures for February delivery settled down $9.80 at $1,098.10 an ounce on the Comex division of the New York Mercantile Exchange.
The dollar rose sharply against the euro and a basket of six major currencies on the back of a rise in U.S. consumer confidence in December.
"Players are still looking to the dollar for direction but the lack of upside this morning, when we had the stronger euro, suggests that there is still some long liquidation going on," said James Moore, analyst at TheBullionDesk.com, said.
"Certainly the longer-term trend is still very much to the upside for gold."
Weakness in the U.S. dollar boosts gold's appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies.
Heavy positioning of buy-stops around the $1,100 level should provide underlying demand in the near term, brokers said.
"It feels like $1,100 is well supported for the time being on the upside. I would say $1,110 seems to be a good resistance," Afshin Nabavi, head of trading with MKS Finance, said.
Strong physical demand for gold was also limiting losses, analysts said.
"That is one of the reasons why gold is being supported every time it goes lower," he said. "So if it continues in this manner, I think probably beginning of next year we should have a move on the upside."
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings stood at 1,132.708 tonnes as of Dec. 28, unchanged since Dec. 21. Holdings hit a record high of 1,134.03 tonnes on June 1.
Among other precious metals, spot silver was at $17.07 an ounce against the previous late New York quote of $17.50.
Investor sentiment was still bullish for the platinum group metals after the U.S. Securities and Exchange Commission took a regulatory step on Dec. 22 that brought the first U.S. platinum exchange traded fund closer to final approval.
Platinum and palladium investors took profits Tuesday after the metals had surged following the news.
Platinum was at $1,462 ounce against $1,479.00, while palladium was at $385.50 against its previous session late quote of $387.50.