Gold prices buckled on Tuesday, briefly losing 2.5 percent before steadying in US trade, as the dollar rallied and oil came under pressure, and traders expect bullion to remain volatile in the short term.
"It has certainly wobbled today, but that is the pattern now and we'll see more of this for some time," a trader said.
A drop in the Dow Jones industrial average to below 11,000 - its lowest since March - also spooked some players into liquidating positions in metals to minimise investment risk, said a dealer at a precious metals refiner.
Spot gold tumbled to $626 an ounce, before it edged to $629.80/630.80 in New York, versus $643.00/4.00 on Monday.
"It is the opposite to yesterday, when the dollar eased and oil was firm," another trader said.
"Now it has weakened because the dollar and oil have changed direction also," he said.
The dollar was higher, extending gains it made after Fed Chairman Ben Bernanke said on Monday the US central bank needed to remain vigilant on inflation even as the economy shifted to a slower pace of growth. This could lead to further interest rate rises in the United States.
On Tuesday the Wall Street Journal reported anti-inflationary comments from another Fed policymaker, which boosted the dollar.
Oil prices stalled as traders weighed the potential risk to supplies from Iran's continued nuclear stand-off with the West against the possibility of rising interest rates.
Gold's rapid fall by more than $100 had dampened confidence and time would be needed for sentiment to revive, traders said.
Gold had fallen out of favour in recent weeks after hitting a 26-year high of $730 on May 12 as funds and speculators sold to take profits.
The metal fell as low as $618.50 last week, down 15 percent from its recent highs, and some said the market was expected to stay in a broad range before rising.
"Gold, then, is likely to remain below resistance in the very short term as inflation prospects are weighed and re-evaluated," Julia Hamblett, vice-president Dresdner Kleinwort Wasserstein, said.
James Moore of TheBullionD-esk.com saw a mixed performance within a broad $625/675 area.
"Despite the potential impact of higher rates in both the US and eurozone, the risk of inflation, as well as potential oil supply constraints from Iran, could easily trigger a jump back to May's $730 high," he said.
Further ahead, Citigroup said on Tuesday it was raising its 2007 price forecast for spot gold to $700 an ounce from the previous $560 it made in January.
It also lifted its forecast for 2008 to $750 from $580, expecting prices to work higher from the fourth quarter of this year.
"We expect gold to consolidate around current levels in the next few months before hiking further to $675 in the fourth quarter and into 2007 and 2008," Citigroup said in a report.
At the Reuters Global Mining and Steel Summit in New York this week, the chief executives of a handful of major producers sounded positive on gold, expecting continued high prices.
In other precious metals, silver seesawed either side of $12.00 an ounce and was last worth $11.83/11.93, down from $12.32/12.42.
Platinum was at $1,231/1239 from $1,251/1,256, while palladium slipped to $344/349 from $356/361.
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