Gold edged lower on Wednesday, extending its losses to a third day, as the euphoria over a Greek debt deal fizzled and investors shifted their focus to US negotiations to avert a looming fiscal disaster in the world's largest economy.
But gold's appeal as a refuge from uncertain economic conditions remained intact as indicated by the holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, which rose to a record high.
US lawmakers resumed talks on how to avoid $600 billion worth of tax hikes and spending cuts that are due to kick off in early 2013, but progress has been slow.
The threat of the US economy slipping off the fiscal cliff may keep gold prices supported, but the strength in the dollar - a more popular safe haven - is likely to put a cap on gains.
The dollar index rebounded from a 3-1/2-week low hit in the previous session, supported by worries about a lingering euro zone debt crisis and decent economic data from the United States.
"We may see gold consolidate or correct a bit in the short term as the market lacks incentives after the Greek deal, while the dollar appears supported," said Li Ning, an analyst at Shanghai CIFCO Futures.
There is not much room on the downside, and prices are firmly supported by the 20-day moving average at about $1,724 an ounce, she added.
Reuters market analyst Wang Tao expected spot gold to retrace to $1,722 during the day, as it may have peaked on its rebound from the November 5 low of $1,672.24.
Spot gold inched down 0.3% to $1,737.14 an ounce by 0626 GMT.
US gold also lost 0.3%, to $1,737.60.
Holdings of SPDR Gold Trust rose to a record high of 1,345.813 tonne on November 27, while iShares Silver Trust, the world's largest silver ETF, saw its holdings remain near a two-month low of 9,818.07 tonne.
In contrast to the stagnant holdings in the silver ETF, spot silver rose to $34.26 an ounce on Tuesday, its loftiest level since mid-October, before easing to $33.82 but still leading the year-to-date performance in the precious metals complex with a 22% rise.
Silver is notorious for its volatility. The metal burned the fingers of many investors last year during its surge to a historical high and a subsequent tumble that saw prices fall more than a third within 10 trading days.
"I'm less sanguine about silver, as lots of mine supply is coming on line and silver doesn't have the same safe-haven status as gold," said a Sydney-based trader.
