Gold fell for a second day on Wednesday, after a surge in U.S. bond yields boosted the dollar and encouraged investors to book more gains after the previous day's record peak.
Gold hit an all-time high at $1,430.95 an ounce on Tuesday as risk aversion flared in the euro zone, but quickly slipped as the rally lost traction.
Spot gold was bid at $1,389.80 an ounce at 1355 GMT, against $1,400.86 late in New York on Monday. U.S. gold futures for February delivery fell $18.4 an ounce to $1,390.60.
The dollar climbed after a proposed extension in U.S. tax cuts prompted a spike in bond yields on Tuesday, which in turn raised the cost of holding gold to non-U.S. investors. While gold has shaken off its traditional inverse relationship with the U.S. currency in the past, when risk aversion has worsened, this has not been the case this week, when the negative correlation has strengthened.
"Clearly there is a more risk-negative tone across the markets today, but I don't think it's been enough to push people into gold's safe-haven qualities," said RBS analyst Daniel Major.
"If you do get higher yields, the opportunity cost of holding a zero-yielding asset like gold is a bit of a concern but it's more of a currency play in the near term," he said.
SAFE-HAVENS BATTERED TOO
German government bonds fell on Wednesday, under pressure from the spike in U.S. Treasury yields, although traders said the move was overdone given the tension surrounding some of the euro zone's debt-laden members.
The rise in U.S. Treasury yields is seen as dollar supportive near-term despite the fiscal impact of the tax plan, while the deal could lift growth next year and lessen the case for bigger monetary stimulus by the Federal Reserve.
This set the euro on track for a third straight day of losses. While this has weighed on gold, the metal has proved it can break its inverse link with the dollar if worries over euro zone debt lifts its safe-haven appeal while pressuring the euro.
"With all the concerns that are around day-to-day, investment demand still remains supportive for gold," said Standard Bank analyst Walter de Wet.
"Until the euro zone debt situation subsides, (the gold-dollar link) will be fairly weak. (But) there will still be profit taking if the dollar strengthens fast. It is the speed of the move which is important, rather than the level."
Jewellers and investors flocked to the physical markets in Asia after bullion prices slipped from all-time highs, keeping premiums steady.
On the investment front, holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, eased to 1,297.726 tonnes by Dec 7 from 1,298.030 tonnes a day before.
The world's largest silver ETF, iShares Silver Trust, said its holdings hit another record at 10,941.34 tonnes by Wednesday.
Silver was bid at $28.20 an ounce against $28.66, still well off the 30-year high at $30.68 it reached on the previous day, causing the gold/silver ratio in turn to pull back from its recent near-four year low.
Platinum was at $1,680.99 an ounce against $1,688.50, while palladium was at $726.47 versus $729.97.
ETFS Physical Palladium Shares , the New York-based palladium exchange-traded product operated by ETF Securities, said its holdings hit a record 1.084 million ounces on Tuesday, having broken through a million ounces for the first time a day before.