(Reuters) - Gold reversed gains in thin trade on Wednesday, under pressure from a firm dollar and weaker stock markets as investors showed their disdain at euro zone leaders' efforts to boost the power of a rescue fund.
Two years into Europe's sovereign debt crisis, investors are fleeing the euro zone bond market, European banks are dumping government debt, south European banks are bleeding deposits and a recession looms, fuelling doubts about the survival of the single currency.
Spot gold rose as much as 0.7 percent to a more than one-week high of $1,726 and briefly breached the 100-day moving average at $1,720.45, before giving up gains to fall 0.5 percent to $1,706.06 an ounce by 1030 GMT.
"It's difficult to see a sharper fall off in gold," said David Wilson, director of metals research and strategy at Citi.
"Europe is still looking like it's probably heading for a recession next year, and that issue is not going away. Politicians are dancing around the edges of the problem, rather than getting to the meat of it," he said.
But if the dollar continued to strengthen against the euro, showing a lack of confidence in the euro zone currency, it was difficult to see a lot of upside to gold either, Wilson said.
Even with this week's 1.8 percent gain, gold is struggling to convincingly break above the 100-day moving average.
SKEPTICISM
The dollar firmed against a basket of currencies .DXY, and the euro slipped. A stronger dollar makes gold more expensive for holders of other currencies.
"We still think there's an enormous amount of skepticism that people don't think that Europe is going to deliver," said Rob Ryan, FX strategist at BNP Paribas in Singapore. "It's clear that short positions are very large, that people are underweight risk, hedge funds are back in cash," he said.
While euro zone ministers have agreed to ramp up the firepower of their rescue fund, they couldn't say by how much, and may turn to the IMF for more help as a leap in Italy's borrowing costs pushed the region closer to financial disaster.
Deepening the depressed mood, European Central Bank governing council member Christian Noyer said on Wednesday that Europe's debt crisis had significantly worsened.
Stocks fell after Standard & Poor's hit some of the world's leading banks with a credit downgrade.
Gold has recently tracked moves in assets perceived as risky, such as equities, shrugging off its traditional safe-haven status. The precious metal is currently more positively correlated to the stocks markets than it has been at any time in the last year.
Gold often benefits in times of economic or financial market uncertainty, because of the portfolio protection it can offer if inflation picks up and because of its immediate convertibility into hard currency.
U.S. gold Technical analysis suggested spot gold could rise to $1,743 during the day after it has cleared a resistance at $1,716, said Reuters market analyst Wang Tao.
Trading volume was thin, as some funds have squared positions to lock in profit ahead of the year-end and others have cash tied up elsewhere.
Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust and the largest silver-backed ETF, New York's iShares Silver Trust remained unchanged from Monday to Tuesday. NL4E7MU059
Silver was down 1.5 percent at $31.46, platinum fell 1.3 percent to $1,521.75 and palladium was off 2.5 percent at $576.13.
