Gold prices fell early on Monday, after the dollar rose on a continued lack of progress in the Greek bailout and a better US economic outlook added to the bullion profit taking seen during the previous session's sharp drop. Gold largely tracked losses in US equities as the failure of Greek coalition parties to approve the terms of a new bailout package rekindled worries about a chaotic default that could spread to euro zone countries, which lifted the dollar index and hit the euro.
Gold dropped 2 percent on Friday after encouraging US payrolls data smashed hopes of extra stimulus from the Federal Reserve, which had been priced into bullion's 11 percent rally in January. "The dollar's up because of worries over Greece and optimism surrounding the US economy after the jobs report. In the long run, there are still a lot of downside risks to the dollar," said Jason Schenker, president of Prestige Economics LLC. Spot gold was down 0.3 percent at $1,721.10 an ounce by 11:54 am EST (1654 GMT), off a low of $1,711.29 hit earlier in the session. US gold futures for April delivery were down $16.30 an ounce at $1,724.
The precious metal is still up nearly 10 percent this year, but if more signs emerge that the economy in the United States is recovering faster than the euro zone, pointing to a stronger dollar, gold may struggle to revisit its highs, analysts say. "As long as the United States maintains its modest growth and the EU continues to disappoint, you would expect the dollar would continue to strengthen, and that wouldn't be positive for gold," said Carl Firman, an analyst at VM Group.
Europe's debt crisis drove many investors to buy gold as a shelter from risk last year, driving the price to a record-high. However, in recent months gold has tended to move more in line with so-called riskier assets, like other commodities.
Demand for physical gold from key Asian markets was strong, however, as buyers took advantage of Friday's price drop to re-enter the market. Major bullion bank HSBC said it was keeping its 2012 average gold forecast at $1,850 an ounce due to accommodative global monetary policies and investor jitters about financial markets. Silver eased 0.1 percent for the day at $33.57 an ounce. Spot platinum inched down 26 cents at $1,617.24 an ounce, while spot palladium was down 0.6 percent at $700.97 an ounce.