Gold slipped to its weakest in a month on Monday before recovering slightly as prices became more attractive, but speculators unwinding long positions and worries about the health of the global economy could curb gains.
Falling equities could force speculators to cash in gold to cover losses and to turn to the safety of the dollar, although the metal could find support at around $1,700, a level which may spark more buying from jewellery makers ahead of the year-end festive season.
Gold was standing at $1,724.46 an ounce by 0639 GMT, up $4.47, but still down from an 11-month peak of $1,795.69 marked in early October. It hit a low of around $1,713 an ounce earlier on Monday.
"There is still a chance that we'll see more selling, but just like this morning, it is evident that there's likely to be some good buying if gold gets closer to $1,700. Personally, I think $1,700 will be held," said Yuichi Ikemizu, branch manager for Standard Bank in Tokyo.
"In the other metals as well, I think we're coming closer to the bottom of the current range," he said, referring to industrial metals.
U.S. gold for December was steady at $1,725.70 an ounce after falling to its lowest in more than a month in early trade.
Hedge funds and other big speculators have cut their bullish bets on U.S. commodities to the lowest levels since the end of August, with funds mostly bailing out of gold after its repeated failure to breach the $1,800-an-ounce mark.
Cash gold powered to a record of about $1,920 in 2011, when investors turned to the metal as a safe haven during the debt crisis in Europe.
European Union leaders face two months of tough bargaining on money, power and the future governance of the euro zone before they can boost confidence that the existential threat to the single currency has faded.
Investors are turning their attention to the U.S. Federal Reserve's policy meeting on Tuesday and Wednesday after the central bank announced its third round of aggressive economic stimulus last month, which eventually sent gold prices to a peak in October.
While investors welcomed the Fed's plan for more economic stimulus, known as quantitative easing, the move underscored worries that the U.S. economy may be in worse shape than feared.
In other markets, shares in Asia fell on Monday as lacklustre earnings from leading U.S. companies and a sharp drop in Japan's exports, a key driver of the world's third-biggest economy, dented risk appetites and prompted investors to take profits on recent gains.
The euro crept up after Spain's prime minister won a boost for his austerity drive with a regional election victory while yen slid to a two-month low against the dollar on expectations of more stimulus from the Bank of Japan.
The physical gold market saw light buying from jewellery makers in Asia, with top consumer India likely to step up purchases because of the festive season there, which will peak with Diwali and Dhanteras next month.
Weddings also take place during this period, with gold jewellery is an essential part of the dowry Indian parents give to their daughters.
"There are very good orders from India. I guess there will be more buying as prices come off," said a dealer in Singapore.
