Gold fell to its lowest level in four weeks around $489 an ounce on Wednesday as investors unwound positions before the end of the year, dragging other precious metals with it.
But overall sentiment remained bullish with physical buying expected to resurface at lower levels and investors diversifying into commodities due to worries about rising energy costs, fears of terrorists attacks and an uncertain outlook on the dollar.
Spot gold fell a low of $489.25 a ounce its lowest since November 23 before rebounding to $490.50/491.25 in morning trade, still lower than $492.90/493.70 late in New York on Tuesday. Gold, used as jewellery and for investment, rose to its highest level in nearly 25 years at $540.90 an ounce on December 12.
"We see very thin trading conditions at this time of the year. It can be a very volatile market. But we expect physical demand for the metal to remain strong," said Craig James, chief economist at Commonwealth Securities in Sydney.
"We have seen sharp swings in the gold price over the last couple of days.
The general trend has been down but I expect that gold has got good support at $475 an ounce.
"And once we get into more liquid trading conditions in 2006, we expect certainly demand from physical buyers to improve," he added.
The key December 2006 contract on the Tokyo Commodity Exchange fell 48 yen per gram to 1,855 yen as investors liquidated their positions ahead of the year-end holidays.
The benchmark contract had tumbled 15 percent last week after peaking at an 18-year high of 2,155 yen on December 12, reflecting the yen's strength and as the TOCOM raised margin requirements to check volatility.
"Sentiment is still bearish after last week's plunges," said Takashi Ogura, manager at Kanetsu Asset Management.
"There are plenty of investors willing to sell gold on rallies. In the near term, the market could test the key contract towards 1,830 yen."
"The long-term trend remains bullish, backed by strong fundamentals, but gold will remain weak in the near term after last week's severe losses," Ogura said.
In other precious metals, platinum fell to $947/952 an ounce from $955/960 late in New York. Sister metal palladium also fell to $246/251 an ounce from $254/258. Silver eased to $8.24/8.27 an ounce from $8.29/8.32 late in the US market.