Gold prices were looking for steadier ground after slipping more than three percent early on Tuesday from yesterday's near-25-year peak as traders took profits, analysts said.
Gold hit its highest since 1981 at $540.90 an ounce on Monday as funds bought the metal on worries about rising energy costs and the stability of the dollar, fears of terror attacks and talk of potential purchases by central banks.
"It's a healthy correction in a bullish market," said David Holmes, analyst at RBC Capital Markets. "We saw quite a bit of long liquidation and we have run into an area where people are comfortable in buying again."
Spot gold had fallen to $522.80/523.60 an ounce by 1554 GMT from $527.90/528.70 last quoted in New York. It briefly touched a high of $528.90 and a low of $519.20 on Tuesday.
Dealers expected liquidity to dip ahead of the end-year holidays, which meant the market could easily get pushed in either direction.
"It's too early to say that the rally is over," said Yingxi Yu, precious metals analyst at Barclays Capital. "But there will be further volatility in the coming weeks because of the year-end book-squaring and post-Christmas profit taking."
Gold's scorching rally had lifted prices by over 20 percent this year, while platinum hit its highest since March 1980 and silver reached its firmest since May 1987.
"For the moment the tone remains bullish," James Moore of TheBulliondesk.com said in a report.
Fund managers had been buying gold as part of a strategy to diversify portfolios, while other investors had speculated about potential buying by central banks, previously long-time sellers.
Frank Holmes, chief executive of US Global Investors, told Reuters this week that heavy demand for gold from Russia, China, India, the Middle East and possibly the United States was likely to push the price up to $650 by the end of 2006.
J.P. Morgan Securities raised its long-term price forecast to $500 from $450. The brokerage sees an average price of $558 in 2006 and $609 in 2007.
Market players were also awaiting comments from the US Federal Reserve, which might raise its key interest rate for the 13th successive meeting, but that could be the end of the tightening process.
"Gold has found interesting support at these levels, I think the market will prepare for another push higher," said John Meyer, analyst at Numis Securities Ltd.
World physical demand was expected to rise by 3 percent this year, according to precious metals consultancy GFMS Limited.
Gold hit a record high of $850 in January 1980, then fell nearly $90 the next day and ended the month at $653. The recent rally was mainly driven by Japanese players.
Other precious metals also witnessed sharp falls in prices.
Platinum dropped to $889/993 an ounce from $1,012/1,016 last quoted in New York, having risen to its highest since March 1980 at $1,015 on Monday.
Palladium fell to $270/275 an ounce from $288/291, while silver eased to $8.57/8.60 an ounce from $8.78/8.81 late in the US market.
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