Gold prices eased a touch on Tuesday after earlier hitting record highs, as a rebound in assets seen as higher risk, such as shares and the euro, took some of the heat out of the appetite for safe havens.
Gold prices remained elevated, however, as investors continued to favour the metal amid heightened concerns that the debt crisis engulfing Greece may ensnare Italy and Spain, and as time grew short for raising the US debt ceiling.
Spot gold hit a peak of $1,609.51 an ounce and edged down 0.1 percent to $1,601.89 an ounce at 1322 GMT. It is up 13 percent so far this year, supported by concerns over the eurozone debt crisis and the potential for further US quantitative easing.
"All depends on what happens in the eurozone... and QE3," said Andrey Kryuchenkov, an analyst at VTB Capital. "(We) don't expect it, but some are pricing it in. Should risk aversion escalate, (gold) will go higher."
The euro rose broadly on Tuesday as debt yields of some weaker eurozone countries retreated, taking a breather after sliding to record lows against the Swiss franc - which is commonly seen as a safe store of value - on Monday.
US President Barack Obama and top lawmakers are also facing more pressure for a debt deal amid a growing sense that a last-ditch plan taking shape in Congress may be the only way to avoid a devastating US default.
"Although the challenges facing the EU and US are different, they share some common themes in that they are both based on sovereign debt issues and are seen as being political as well as economic in nature," said HSBC in a note.
Investors are hoarding gold and cash as a perfect storm brews in equity and credit markets, with data published by EPFR Global, which tracks flows in and out of funds, showing a thirst for gold helped drive the biggest inflows into commodities funds for 14 weeks in the week to July 15.
Holdings of precious metals-backed exchange-traded funds rose on Monday, with the amount of gold held by the largest gold ETF, New York's SPDR Gold Trust rising by 13.3 tonnes after a 10-tonne inflow the previous day.
"Exchange-traded funds in the last five sessions have gained just over 50 tonnes (of gold), so there is clearly money coming back in," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.
The largest silver-backed ETF, the iShares Silver Trust said its holdings rose 39.4 tonnes on Monday. The gold:silver ratio - the amount of silver needed to buy an ounce of gold - dipped under 40 this week for the first time since early May as silver outperformed gold in a rising market, a common phenomenon given its lower liquidity.
"Silver is clearly benefiting from its greater affordability, attracting investors who are keen on hard assets during these uncertain times," said UBS in a note. "(Its ratio to gold) looks poised to fall further in the near term, particularly if risk aversion continues to dominate."
Silver was bid at $40.24 an ounce against $40.51. Spot platinum was bid at $1,770.24 an ounce versus $1,769.98, while spot palladium was at $790.97 an ounce against $792.57.