LONDON (Reuters) - Gold eased from two-week highs on Tuesday, breaking its longest stretch of daily gains since the start of this year, in line with the dollar paring earlier losses incurred by waning investor confidence in the reliance of the U.S. economy.
A sharp fall in business activity in the U.S. Midwest combined with data on Monday showing Spain was in recession dented investor appetite for risk and supported the safe-haven yen, which also rose against the broadly weaker Australian dollar.
Gold has drawn a degree of strength from the most recent spate of data from the United States that has revived expectations among some quarters of the investment community for the Federal Reserve to offer additional support to the economy via a third round of quantitative easing, or purchases of government bonds to anchor market interest rates.
Spot gold was down 0.1 percent at $1,661.59 an ounce by 0907 GMT. The price had risen for the five consecutive sessions to Monday.
Public holidays across continental Europe suppressed volumes in gold futures.
"What I would definitely say is, near term, I can't see the price breaking higher, to $1,700 an ounce or above. It needs another catalyst, something more powerful than perhaps in the near future there could potentially be QE," Nikos Kavalis, an analyst at RBS, said.
"Of course, an excessively loose monetary policy environment will continue but whether there is a need for another QE, I am not convinced," he said. "We are in an environment where market-specific fundamentals are taking a bit of a backseat and general sentiment is really the driving force."
Though the disappointing data may fuel expectations that the Fed might launch more QE, the central bank's top two policymakers both said they saw no need for further easing but also said they do not believe the Fed should quickly move to raise rates. (nL1E8FU562) (nL1E8G10JW)
The gold price ended April in the red for the third consecutive month after data showed improvement in the U.S. economy and the Fed's stance became less dovish.
Gold benefits from low interest rates in that it can compete more effectively for investor cash that can see diminished returns from stocks or bonds. Loose monetary policy also creates the potential for a pick-up in inflationary pressures, something gold can help portfolio managers guard against.
"The bullion markets have been on the defensive since U.S. Federal Reserve Chairman Ben Bernanke began distancing the Fed from a third round of quantitative easing in testimony to Congress on 29 February," HSBC analyst James Steel said.
"Prices appear to be stabilizing above $1,620 an ounce, however, and we believe that net long positions on the Comex in gold and silver have fallen to levels at which latent bulls may begin to rebuild positions. This leads us to believe that prices may bottom out, at least in the near term," he said.
The belief that the gold price may avoid a more protracted sell-off was reflected in investor demand for the metal in exchange-traded products.
ETPs witnessed their largest one-day net inflow in a month, reflecting investor demand for the metal, which has recovered from three month-troughs to hit two-week peaks this week.
Holdings of metal in the world's largest ETPs monitored by Reuters rose by 129,120 oz, or 0.18 percent, by the close of business on Monday to a total of 70.259 million ounces.
Gold's inverse correlation to the U.S. dollar softened for a second day running to approach -62 percent, its least negative in nearly two weeks, meaning the bullion price is less likely to move in the opposite direction to the greenback than it was at the start of April, when this correlation deepened to -70 percent.
So the dollar's drop to two-month lows against the Japanese yen on Tuesday did not give the bullion price much of a lift.
Gold may have fallen for three straight months, but it is currently putting on its strongest performance against silver since the start of the year.
The gold/silver ratio, which measures the number of ounces of silver needed to buy one ounce of gold, has risen to its highest since January 19, having hit a four-month low on February 29, when the gold price lost more than 5 percent in one day, its largest one-day drop since the collapse of Lehman Brothers in late 2008.
Gold has lost nearly 7 percent in three months, compared with a near-18 percent drop in the price of silver in this time.
Silver which has gained a net 11 percent so far in 2012, was down 0.7 percent on the day at $30.80 an ounce.
Platinum was down 0.2 percent on the day at $1,559.02 an ounce, while palladium was down 0.5 percent at $674.47 an ounce.
Additional reporting by Rujun Shen in Singapore; editing by William Hardy