Gold rose 1 percent on Friday, erasing early losses, as reservations over this week's bailout plan for debt-laden Greece and concerns over negotiations to raise the US debt ceiling lifted interest in the metal as a safe store of value.
The precious metal retreated from this week's record high at $1,609.51 an ounce after European leaders agreed a rescue package for Greece on Thursday, boosting appetite for assets seen as higher risk, like stocks, at the metal's expense.
However, it has since rebounded as investors moved back into safe havens like gold, German bunds and the Swiss franc as they digested the details of the plan.
"The euro-Swiss franc is the same story, it moved quite aggressively (in the wake of the plan) to above 1.18 and now it's back below there," said Georgette Boele, head of forex and commodities research at ABN Amro.
"That is giving the same signal - we had an agreement, and now players want to look at the details. If they are getting confident that the agreement is good, you will probably get a new wave of confidence in the markets in general and that will put gold under pressure."
Spot gold rose as high as $1,604.81 an ounce and was up 0.9 percent at $1,601.09 an ounce at 1342 GMT. Prices have risen more than 12 percent so far this year. The German Bund future turned positive as enthusiasm over the euro zone rescue plan gave way to concerns it will not be enough to get the heavily-indebted country back on a sustainable fiscal path and ring-fence contagion.
The euro pared gains against the Swiss franc, European shares came off highs and US stock futures pointed to a flat opening on Wall Street by midafternoon.
"While yesterday's agreement was as comprehensive as it could possible be, many legal and political issues need to be ironed out and the crisis is far from solved," said Swiss bank UBS in a note.
"Although gold could lose steam in the short term, Europe will remain a primary catalyst for further gains over the medium term. That gold hasn't reacted to any great extent suggests that many investors are not fully convinced by yesterday's developments."
In Washington, efforts to avoid a US default are set to enter a critical stage on Friday, with President Barack Obama and top lawmakers engaged in a sometimes chaotic drive to strike a sweeping deficit-reduction deal.
Negotiators have struggled to agree on terms for raising the government's $14.3 trillion debt ceiling. If it fails to do so by an August 2 deadline, the world's biggest economy would be unable to pay all of its bills.
"Don't forget that even if there is now less need to invest in gold as a safe haven from European investors, you still have the debt situation in the United States, where the debt ceiling has to be lifted," said Peter Fertig, a consultant at Quantitative Commodity Research. A biannual Reuters poll of leading analysts' and traders' price forecasts showed most expect the precious metal to keep rising this year and next as concerns over debt persist and interest rates remain low.
Respondents forecast a median average gold price of $1,510 an ounce for this year, rising to $1,575 an ounce in 2012. Among other precious metals, silver was bid at $39.88 an ounce against $39.28, having tracked gold up to 2-1/2 month highs earlier this week.
"Recovering industrial demand due to stronger global economic growth anticipated for 2011 should be the key driving factor which will see silver outperforming gold," said Credit Agricole in a note. "Investor appetite, though, should still be the key driver of price strength, as investors view silver to be in a win-win situation under most scenarios - tracking gold higher on safe haven flows and also rallying in line with the rest of the industrial metals complex."
Platinum was at $1,789 an ounce versus $1,781, and palladium at $805.22 an ounce against $805.47.