Gold steadied in Europe on Friday, arresting a slide that took it to two-week lows earlier in the session, as lower prices tempted some buyers back to the market amid persistent fears over the euro zone debt crisis.
The VIX index, Wall Street's chief measure of investor anxiety, closed at its highest since March 2009 on Thursday, on growing fears that the euro zone's handling of its sovereign debt problems could jeopardize the global economic recovery.
Spot gold was bid at $1,181.50 an ounce at 0916 GMT, against $1,181.10 late in New York on Thursday. U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange fell $6.70 to $1,181.90 an ounce.
Prices earlier fell to a low of $1,166.50 an ounce, down more than 5 per cent from last Friday. Traders say prices are due a period of consolidation after rising 6 per cent in the first two weeks of May to record highs at $1,248.95 an ounce.
"We traded up from $1,125 to the high at $1,248 not even in a month, so it is quite normal that you have a movement against that," said Commerzbank trader Michael Kempinski.
"There is really too much investor money in there, and the funds are not all interested in the long term performance. Long term, I'm not really worried, I'm sure gold is coming back."
The correction in prices is also likely to bring more demand for physical gold, in the form of coins, bars and jewellery, Mr. Kempinski said. "It's good to have a healthy consolidation, so that the physical market comes back into line."
Equity markets extended losses on Friday, on persistent concerns over euro zone sovereign debt levels and tougher financial regulation. European shares were down 0.5 per cent in early European trade.
The euro clung onto its gains against the dollar as fears of currency intervention rose. Oil prices meanwhile fell back below $70 a barrel, having touched their lowest since July on Thursday.
ETFs HOLD FIRM
Investment demand for physical gold continued to be firm, meanwhile, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust , at a record 1,220.152 tonnes on Thursday.
The gold exchange-traded products operated by London's ETF Securities were also little changed on Thursday.
The resilience of ETF holdings during gold's latest leg lower has cheered investors who believe the longer-term outlook for the metal against a backdrop of volatility in the wider markets and rising fears over euro zone debt levels is positive.
"The move in gold has been really unusual, given the level of concern in the markets," said Nick Bullman, managing director of Bullman Asset Management.
"My view is still that in a period of strong monetization by governments, it will come out as the only real store of value," he said. "It can get to $1,300 this year, and it will go higher if things spiral out of control. This is a great buying opportunity."
Among other precious metals, platinum and palladium recovered some of the losses that took them to their lowest since early February in Asia overnight.
Platinum hit a low of $1,449, a 15.5 per cent drop from last Friday's level, and was later at $1,490.45 an ounce against $1,509. Palladium fell as low as $393 an ounce, down 25 in the week so far, was later at $410.93 versus $412.75.
"Encouragingly there is little sign of a mass exodus of ETF investment exposure, and given the scale of correction, current levels may be looking attractive to longer-term investors given the improving fundamental outlook," said James Moore, an analyst at TheBullionDesk.com.
Silver was bid at $17.70 an ounce against $17.59.