Gold stumbled in Europe on Tuesday afternoon after a firm dollar triggered fund liquidation, but strong oil prices and overall dollar uncertainty should limit losses, dealers said.
Spot gold fell as low as $412.55 an ounce as weak longs sold, but then backtracked slightly to trade at $413.85/414.60 per troy ounce by 1448 GMT, still sharply lower than $421.45/422.20 quoted late in New York on Monday.
"In our view this demonstrates one of the key differences in this latest gold surge with that of early this year, with speculators having a much shorter time horizon and happy to take profits into price strength rather than hold for price to break new ground," Kamal Naqvi of Barclays Capital said in a daily note.
Traders noted good Far Eastern selling in earlier trade, which, coupled with a softer dollar triggered some of the weaker funds to take profits.
"We've seen fund liquidation basically due to the failure to break above $426," one trader said.
He said gold could fall as low as $410 an ounce, where he thought it would probably hold, with some producer buybacks lurking just under that level.
Gold bulls were disappointed over the lack of follow through at the end of last week when bullion rallied to its highest in six weeks at $423.70.
The dollar gained against European currencies on Tuesday, falling as low as $1.2288 versus the euro earlier in the day.
Oil's rally continued relentlessly, with prices vaulting $54 a barrel as supply hitches hindered consumers' efforts to build winter heating fuel inventories.
The higher oil price has encouraged buying of gold - both as a possible hedge against inflation and as part of overall fund purchases of buoyant commodities.
Some analysts said the short-term balance of risk for gold seemed to be moving to the downside.
"As we noted last week, the gold market has already moved to factor in a weaker dollar and as a result is even more vulnerable than normal to a strengthening dollar/weaker euro," Alan Williamson of HSBC said in a report.
Silver dropped back under $7.00 in line with losses on gold, falling to $6.97/7005 from $7.16/7.19.
Platinum dropped to $836.00/841.00 from $845.00/850.00 in New York, while palladium fell to $218.00/223.00 an ounce, down from $225.50/231.50 in the US market.