Gold prices steadied on Tuesday after hovering in a broad range, with investors taking stock of the conflict in the Middle East and watching other markets for short-term direction.
Spot gold hit a low of $641.60 an ounce before rising as high as $653.25, but traded at $646.10/646.70 by 1502 GMT. It closed at $650.30/651.80 in New York late on Monday, when prices fell four percent from a two-month high of $676.
"Although gold is likely to hold in consolidation around the $650 level following its recent rally to multi-week highs, the highly combustible situation in the Middle East should still prove supportive," Standard Bank said in a note.
Israeli warplanes battered Lebanon on Tuesday, killing 26 people, and more Hizbollah rockets hit the Israeli city of Haifa, with no sign that diplomacy would halt the week-old conflict any time soon.
Analysts said Monday's selloff to lock in profits had made people nervous despite the military conflict and firm oil.
"It's (the sell-off) going to make people very cautious but that doesn't mean to say that developments in the Middle East wouldn't have any impact," said Stephen Briggs, economist at SG Corporate and Investment Banking.
"It is unlikely that we would suddenly settle down into a nice, comfortable $5 range. It's probably going to be pretty volatile," he said, adding any escalation in the conflict could boost gold prices.
The dollar rose to near three-month highs against the Swiss franc, boosted by automatic buy-dollar orders, while the dollar index also reached its highest since April 28. Traders were waiting for US inflation data due over the next two days and testimony by Federal Reserve Chairman Ben Bernanke this week to the Senate Banking Committee.
The Fed raised interest rates for the 17th straight time to 5.25 percent in June, and economists are divided on whether it will boost the funds rate again in August to 5.5 percent.
A rise in the rate generally makes the dollar attractive and puts pressure on gold.
"We expect gold to remain volatile in a largely sideways pattern over the third quarter, but see potential for it to resume a clear upward path in the fourth quarter," Barclays Capital said in a report.
In other precious metals, silver was steady at $10.97/11.07 at 1453 GMT from $11.02/11.12 in the US market.
Platinum fell to $1,221/1,226 an ounce from $1,237/1,242 late in New York, while palladium declined to $312/317 an ounce from $318/323.
South Africa's Anglo Platinum said it had received a court go-ahead for its new mine operated by Potgietersrust platinums. The project is expected to more than double output at Potgietersrust which produced 205,300 ounces in 2005.
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