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Gold bars are seen in this picture illustration taken at the Czech National Bank in Prague January 31, 2011.


Gold prices snapped an unprecedented 11-day winning streak Tuesday, falling more than 1 per cent as signs of progress in talks to avert a U.S. default sapped safe-haven buying.

Silver also tumbled, more than 4 per cent, as investors tentatively bought back into riskier assets after U.S. President Barack Obama supported a bipartisan proposal for a new deficit-reduction plan. The S&P 500 jumped 1.5 per cent and crude oil and copper also rose sharply.

But with Europe's debt woes largely unresolved and a U.S. deal to raise the debt ceiling facing an Aug. 2 deadline, dealers cast gold's pullback as a healthy correction in a market that had become technically overextended after its best two-week rally in 2-1/2 years.

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"I think when all is said and done, the market will focus on the other factors. This is going to be nothing more than a knee-jerk reaction rather than a selloff," said Bill O'Neill, partner of commodity investment firm Logic Advisors.

Bullion is still up nearly 6 per cent this month due to uncertainty over whether politicians will reach a deal to raise the $14.3-trillion (U.S.) borrowing limit before the deadline. A European debt crisis engulfing Greece that may spread to Italy and Spain also underpinned the metal.

Spot gold, which hit a new record $1,609.51 an ounce earlier in the day, fell 1.2 per cent to $1,584.76 as of 3:35 p.m. ET.

U.S. gold futures for August delivery settled down $1.30 at $1,601.10 an ounce, but fell by more than $12 in after-hours trading following Mr. Obama's comments. Volume topped 200,000 lots, one of the busiest days in more than two months.

Silver was down 4.2 per cent at $38.81 an ounce.

Mr. Obama said the ambitious budget plan brought forward on Tuesday by the "Gang of Six" group of senators could provide new ideas for breaking the impasse in Congress over raising the credit limit, one of the first major signs of progress in a months-long saga that has recently begun to wear on markets.

While gold prices could fall by hundreds of dollars in the short term, the rally will likely last for years as policy makers use every available tool to shore up fragile economies, said Sandy McGregor, a portfolio manager for South African investment firm Allan Gray Ltd, the third-largest shareholder of the world's biggest gold ETF.

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Still, jitters remained in the financial markets given divisions among policy makers ahead of Thursday's euro zone summit, with few expecting a permanent solution to the region's debt crisis.

A tax on euro zone banks and cheaper, longer-dated official loans are the least risky way to provide extra funding for debt-stricken Greece, a confidential paper drafted ahead of the European summit showed.

"People are just stepping back ... we are going to end the week with the same concerns that we came into the week with, and people realize that," said Zachary Oxman, managing director with TrendMax.

Physical demand rose, with investors looking to hoard gold and cash as a perfect storm brews in equity and credit markets.

Data published by EPFR Global, which tracks flows in and out of funds, showed a thirst for gold helped drive the biggest inflows into commodity funds in 14 weeks during the week to July 15.

Holdings of precious-metals-backed exchange-traded funds rose on Monday, with the amount of gold held by the largest gold ETF, New York's SPDR Gold Trust, adding 13.3 tonnes after a 10-tonne inflow the previous day.

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Spot platinum was down 0.5 per cent at $1,761.99 an ounce, while spot palladium was down 0.9 per cent at $785.22 an ounce.

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