Gold dropped 1.5 percent to its lowest in one week on Wednesday as a rebound in the dollar prompted investors to liquidate positions, dealers said. Silver paused for breath after rallying to a six-month high on Tuesday, while platinum fell to a five-week low before gaining.
"We have gone back to that tried-and-tested relationship, which is inverse to the dollar. So it all depends on where the dollar goes now," said Stephen Briggs, economist at SG Corporate and Investment Banking.
"It has been such a big move in the last couple of weeks and gold has focused very much on the dollar and not on anything else very much," he said, but added that sentiment for gold was generally bullish.
Spot gold rose as high as $642.90 an ounce before slipping to $633.00. It was quoted at $636.10/636.85 by 1520 GMT, down from $642.30/643.80 in New York late on Tuesday.
"We still forecast gold higher on a one-month and longer time period ... but we are concerned that the metal will come under selling pressure before the end of the year," said John Reade, head of metals strategy at UBS Investment Bank.
The dollar rose broadly as a report showing strong growth in private sector US employment in November eased concerns the Federal Reserve may cut interest rates in coming months. A stronger dollar makes gold costlier for holders of other currencies and often lowers bullion demand.
"The dollar remains a key factor in deciding market direction, with this week's ECB rate decision and Jobs data potentially adding further volatility in the second half of the week," said James Moore, analyst at TheBullionDesk.com. The European Central Bank (ECB) is expected to raise its key interest rate in a policy meeting on Thursday to 3.5 percent and may signal more increases in 2007. Investors also await Friday's US non-farm payrolls report.
Gold has tried to break the stubborn $650 level but it only managed to go as far as $649.50 - a 16-week high on Friday. Dealers said a breach of the level would help gold challenge the next target of $675 and it might revisit $700 this year. Gold hit a 26-year high of $730 in mid-May.
The physical sector saw buying from Indonesia but purchases were too small to lift premiums for gold bars, which remained unchanged at between 20 and 30 US cents an ounce to the spot London price in Singapore.
In other precious metals, silver fell to $13.81/13.86 an ounce, against $13.81/13.88 in the US market and Tuesday's six-month high of $14.17 an ounce. Platinum dropped to a five-week low of $1,117 an ounce before rebounding to $1,129/1,134, versus $1,127/1,132 in the US market. Palladium fell to $324/329 an ounce from $329/334.