Gold matched a two-month high around $635 an ounce on Friday as the dollar weakened after China's central bank said it had a clear plan to diversify its $1 trillion in foreign exchange reserves.
But profit taking quickly erased some of the gains, suggesting that dealers were not sure whether the diversification meant the central bank would boost its gold reserves.
China is the world's 10th-largest holder of gold, according to the World Gold Council, holding 600 tonnes. Spot gold hit an intrude high of $635.50 an ounce before slipping to $633.25/634.00 an ounce, down slightly from $633.60/634.60 late in New York. Gold rallied nearly 3 percent in New York on Thursday as investors bought on rising oil prices, a weak dollar and on speculation that China would buy gold for its foreign currency reserves.
"Frankly speaking, I haven't heard about this, but there's always a possibility that China will diversify its gold reserves," said a dealer at an investment bank in Singapore.
China central bank governor Zhou Xiaochuan told Reuters on Thursday that China was considering many instruments to diversify its foreign exchange reserves, without being specific.
Yukuji Sonoda, a precious metal analyst at Daiichi Commodities in Tokyo, shrugged off speculation that China could buy gold, but said the metal was poised to test the highs again on the back of a weaker dollar.
"I don't believe it. This is only a speculation by some people. Somehow, people say such thing to support gold," said Sonoda, who expected the metal to rise to $700 by the end of this year.
"The same thing happens with platinum. Some people said ETF platinum would start, but this is the same story," said Sonoda, referring to last week's speculation, which triggered a rally in metal.
Platinum spiked to its highest since September 11 at $1,213 last on Friday on rumours of a launch of a platinum exchange-traded fund. But nothing has happened since and dealers started to question the likelihood of the launch. There have been rumours China was planning to buy gold, but dealers said high and volatile prices might be the reason why the central bank was reluctant to diversify its holdings into gold to hedge against a decline in the dollar.
Gold rallied to a 26-year high of $730 in mid-May as tensions in the Middle East, rising energy costs and uncertainty in the dollar's outlook sparked safe-haven buying. The metal has swung back and forth since. The euro was little changed at $1.2835 after rising to $1.2849 on electronic trading platform EBS a day the highest since the start of September.
The dollar inched down to 117.80 yen. Platinum rose to $1,206/1,211 an ounce from $1,202/1,208 an ounce in New York. Palladium eased to $334/339 an ounce from $335/340. Silver rose as high as $13.01 an ounce, just below a 2-month high of $13.02 hit on Thursday. It was last quoted at $12.99/13.06 in New York.