Gold softened on Friday, after falling to a two-week low the previous day, as a budget offered by U.S. President Obama gave a rosier outlook for the economy, dampening the precious metal's safe-haven appeal.
With their longer-term inflation fears easing slightly, investors are taking profit, cautious of the market's ability to rally and hold above the $1,000 level topped a week ago.
Spot gold was quoted at $938.80 per ounce at 0245 GMT, down 0.6 percent from New York's notional close of $944.70 on Thursday, and also down from the 11-month high above $1,000 marked last Friday.
Gold has fallen about 5 percent over the previous four trading days and is about 9 percent shy of the record-high $1,030.80 struck last March. Bullion is set to rise 1.3 percent this month compared with January.
"It's more profit taking after the market rose above $1,000 a week ago," said Adrian Koh, a trader at Philip Futures.
"Investors are getting a bit more cautious about whether the market will rally back above $1,030 in the near term."
Gold's allure was dented after President Obama made his first forecast since taking office that the U.S. economy will shrink 1.2 percent in 2009 before rebounding to 3.2 percent growth in 2010.
Obama predicted on Thursday a $1.75 trillion deficit for the 2009 fiscal year, the biggest U.S. deficit since World War Two in a budget, underlining the heavy blow the recession has dealt to the country's finances.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings hit a record 1,029.29 tonnes on February 26, up 0.31 tonne from February 19.
The spot gold market is likely to see a negative tone in the near term as investors take a breather, with growth in SPDR holdings moderating after repeatedly hitting records in the previous two weeks, Philip Futures' Koh said.
In the longer run, gold would remain supported as investors are unsure about the effectiveness of measures the U.S. and other governments are taking to prop up their economies, traders said.
But they added that funds flowing out to risker assets from gold, regarded as safe-haven investment, should be limited as long as there is no clear sign of global demand picking up.
