Gold slipped more than 1 percent on Wednesday as oil prices eased and as investors, disappointed at the metal's failure to break technical resistance above $885 an ounce, sold bullion in favor of more buoyant assets.
But the outlook for the precious metal remains favorable, traders said, with the dollar weakening against the euro and investors still worried by the outlook for the global economy.
Spot gold was quoted at $847.80/849.80 an ounce at 10:03 a.m. EST, against $863.35 late in New York on Tuesday. U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange were down $17 at $849.00.
"It looks as if the market is already very long, and there is no fresh money coming in," said Deutsche Bank trader Michael Blumenroth.
He said investors had become frustrated with the metal's inability to break through technical resistance at $885-890.
"The other metals -- platinum, palladium and silver -- are performing better than gold," he said. "Investors are buying more platinum group metals at the moment."
A slip in oil prices is also weighing on gold. Crude fell more than 2 percent to below $48 a barrel as the market awaited U.S. inventory data at 10:35 a.m. EST.
Nonetheless the longer term outlook for gold is positive. The precious metal is likely to benefit from falling interest rates, which cut the opportunity cost in holding gold, and from uncertainty over the global economic outlook.
The dollar is also providing some short-term support. It slipped on Wednesday after striking a one-month high against the euro after a report showed steep job losses in the private sector, fuelling fears of a U.S. recession.
Gold is often bought as an alternative investment to the U.S. currency and tends to move in the opposite direction to it.
Demand for the precious metal to back exchange-traded funds is also firm. The world's largest gold-backed ETF, the SPDR Gold Trust, said its holdings rose to a record 788 tonnes on Tuesday.
SPDR has now overtaken the Bank of Japan as the seventh largest holder of gold worldwide, Commerzbank said.
Traders are now looking ahead to economic data due later in the week, including key U.S. non-farm payrolls data on Friday, for clues as to the next direction of trade.
Disappointing payrolls data "could lead to weakness on the equity markets and push more people toward gold," said Citi analyst David Thurtell.
