Gold bounced in European trade on Friday as the metal's overnight drop of nearly two percent attracted bargain-hunters and physical buyers as the dollar eased. Gold had been under pressure from sustained selling as investors locked in profits, but the weaker dollar and violence on the Lebanon-Israel border lifted the metal.
"If you look historically over the last five years, gold does tend to benefit in the short term from geopolitical events, but that positive influence fades very rapidly," said Michael Lewis, head of commodities research at Deutsche Bank in London.
"We need to have a much more convincing weakening of the dollar to see gold re-test the highs of over $700 an ounce," he said, adding that market sentiment was bearish in the short-term, but gold should gain in the next 18 months.
Gold fell as low as $620.30 an ounce in Asia on profit-taking, but recovered to $634.20/634,90 an ounce by 1512 GMT. It closed at $632.00/633.00 in New York late on Thursday, when it fell about 1.5 percent.
The dollar hit one-week lows versus the euro and the yen and a 6-week low against sterling after minutes from the Federal Reserve's last policy meeting further cooled expectations for a US rate hike next month.
A weak dollar makes gold cheaper for holders of other currencies and often lifts demand for the metal.
Dealers expected gold to trade in a choppy $615-$665 range in the next few weeks, with heavy technical selling expected to emerge if the metal breached key levels.
"It's definitely a continuation of what we saw yesterday. The market is of the opinion that maybe the inflationary fears are overcooked," said Darren Heathcote, head of trading at Investec Australia in Sydney.
"The geopolitical tension will still be there... but at the moment, some people have been happy to take profits," he said.
Israel warned Lebanese civilians to leave border villages on Friday and called up thousands of reserves in a possible prelude to a ground offensive that would expand its 10-day-old campaign against Hizbollah guerrillas.
"Further liquidation might possibly see gold move lower, but a consolidation phase would be more likely," Standard Bank said in a report.
In other precious metals, silver rose to $11.15/11.25 an ounce from $10.98/11.08 late in New York, while palladium was at $306/311 an ounce, versus $309/314.
Platinum fell to $1,211/1,217 an ounce from $1,222/1,228 in the US market.
Russia's Norilsk Nickel, the world's largest nickel and palladium miner, said it had increased its forecast for 2006 palladium output to 3.050-3.100 million ounces from 2.90-2.95 million ounces previously.
It raised its platinum forecast to 720,000-730,000 ounces from 690,000-700,000 ounces.