LONDON: Gold fell on Thursday, retreating further from the previous session's seven-week high as the dollar and European shares firmed, dulling gold's appeal as an alternative investment.
Spot gold was down 0.5 percent to $1,220.06 an ounce by 1034 GMT. The metal rose to a seven-week high of $1,238.20 on Wednesday, before giving up gains on a steadier equity markets.
Gold was still on track for a 2.6 percent weekly gain so far, the biggest since mid-Oct, as it benefitted from a pullback in the dollar over the past few sessions.
"The key driver behind the recent recovery in prices is the short-covering activity in the futures markets and not really a change in fundamentals," Julius Baer analyst Carsten Menke said.
"The fundamental picture is still skewed towards interest rates normalisation in the United States next year and maybe more dollar strength in the medium term and generally a picture of economic recovery, with positive risk appetite that should limit demand for gold as a safe haven."
The dollar was up 0.2 percent against a basket of currencies and was expected to firm further ahead of the U.S. Federal Reserve's policy meeting next week, which could give cues on the timing of the central bank's interest rates hikes.
A sooner-than-expected rise in interest rates could boost the dollar and hurt non-interest-bearing bullion.
European equities edged higher, while a decline in oil prices paused, although prices remained around five-year lows.
Weakness in energy prices has weighed on gold sentiment lately, dulling the metal's appeal as a hedge against oil-led inflation.
"It is good that gold is able to stay above $1,200 despite another slump in oil prices. But it is a little bit concerning we haven't been able to build on it with the dollar weakening quite a bit," said a Hong Kong-based precious metals trader.
"If we stay near $1,230 for a while without making any progress, it might turn out to be bearish," the trader added.
Safe-haven demand and short covering have been behind gold's recovery from four-and-a-half-year lows hit last month, traders said.
An improvement in sentiment was seen in the holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund. The fund saw inflows of nearly 3 tonnes on Wednesday, bringing total holdings to 724.80 tonnes.
Despite those inflows, holdings are still firmly near six-year lows.
Among other precious metals, silver snapped a three-day rally, falling 0.5 percent to $16.97 an ounce, while platinum rose 0.4 percent to $1,238.25 an ounce and palladium gained 0.5 percent to $814.70 an ounce.
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