Gold was steady in quiet European trade on Tuesday, supported by moderate fund buying and increasing physical demand, but thin volumes may make the market volatile in the last trading days of the year.
The metal is seen trading on higher ground in the new year as positive fundamentals, worries about inflation and economic growth and likely buying by central banks may lift gold's safe-haven appeal, dealers said.
"I think near-term volatility is going to persist. There is a general sense of lack of direction in the market," said Yingxi Yu, precious metals analyst at Barclays Capital.
"It's difficult to see heavy buying ahead of year-end," she said, adding prices were unlikely to move above $510 an ounce in the coming days, while $500 was expected to give good support.
Spot gold was quoted at $502.70/503.50 by 1515 GMT, against $503.30/504.10 late in New York on Monday and way below a near-25-year high of $540.90 hit on December 12.
Gold fell by nine percent from its recent peak to $492.90 last week as market players booked profits and Japan imposed restrictions on gold futures to check volatility.
Japanese gold futures rose on Tuesday, extending gains as the yen weakened against the dollar, making gold attractive.
"The market is now in the hands of the usual year-end liquidity players, which should balance out the year-end book squaring operations and the continued appetite of the funds," UBS Investment Bank said.
"Spot traders would love to skip this difficult time, where almost every single order is able to move the market on the back of ever-dwindling liquidity."
Dealers noted buying interest in Southeast Asia and India, the world's largest consumer, suggesting consumers had started to get used to the $500 level.
"Steady demand from the physical sector at current levels is a positive indication to the market," James Moore of TheBulliondesk.com said in a report.
Indian dealers said demand had increased after gold's recent price correction. In the country's financial hub of Mumbai, gold sales rose to 200 kg a day from 50 kg in recent weeks. But volumes remained below the 500 kg normally sold at this time.
"An increase in buying will happen only when the prices stabilise and stay at that level for some time," said Suresh Hundia, a bullion trader in India.
In Southeast Asia dealers noted active pre-Christmas buying from Singapore and Malaysia as well as investment buying from Thailand when gold dropped below $500.
The market saw liquidation on Monday after the Bank of Portugal's announcement that it had sold 10 tonnes of gold in a bid to diversify its reserves.
Industry players also noted China's plans to let large firms directly export and import gold and gold products in a move to liberalise the world's fourth largest gold-producing industry.
In other precious metals, platinum declined to $960/965 an ounce from $972/976 late in New York. Palladium fell to $255/259 an ounce from $260/264.
Silver edged down to $8.50/8.53 an ounce from $8.55/8.58 late in the US market.
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