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Gold fell Monday, notching its first monthly decline in six months, as strong U.S. factory and spending data coupled with fading worries about the euro zone debt crisis put a damper on the metal's rally.
But the prospect of unrest in Egypt spreading across the Middle East should fuel safe-haven buying in the near term, traders said. Mass protests in Cairo powered bullion nearly $40 US an ounce higher on Friday to its biggest gain in eight weeks.
Investors fled the gold market Monday on signs of a receding euro zone debt crisis and a firmer footing for the U.S. economy.
"Today's decline (in gold) is just a blip on the radar. The de-risking trade that we saw on Friday is going to reassert itself," said James Dailey, portfolio manager of the TEAM Asset Strategy Fund.
The unfolding events in Egypt are "obviously the storyline right now", he said.
Gold faced pressure from data showing factory activity in the U.S. Midwest hit a 22-year high in January as orders surged and employment prospects brightened, and as a report showed consumer spending ended 2010 on a firmer footing.
Spot gold hit a low of $1,322.90 during the day. U.S. gold futures for April delivery settled down $7.20 at $1,334.50 an ounce, with total volume sharply lower than usual at around half of Friday's 300,000 lots.
Gold's decline came as commodities were on course to end January up 2 percent after London's Brent crude oil surpassed $100 a barrel for the first time since 2008.
U.S. crude, the benchmark for world oil prices, raced to catch up with Brent, jumping 2 percent to above $91 US on fears that unrest in Egypt could spread to Middle East oil-producing nations and disrupt oil shipments through the Suez Canal.
U.S. stocks rose on strong earnings and signs of a strengthening economic recovery, denting gold's appeal as an alternative investment.
Gold has come under pressure this month from a raft of more positive U.S. economic data, which has lifted appetite for assets seen as higher-risk, such as stocks.
The euro headed for its second monthly advance against the dollar and more gains could be in store after a jump in euro zone inflation bolstered the view interest rates in that region could rise more quickly than in the United States.
The prospect of higher interest rates may hurt gold, analysts said, as the opportunity cost of holding non-interest-bearing assets goes up as rates increase.
Scenes in Egypt, where protesters intensified their campaign to force President Hosni Mubarak to quit, have encouraged some safe-haven buying of gold, although some analysts say this support is unlikely to last long.
"What we've seen is (Egypt) has limited the downside more than anything," said VTB Capital analyst Andrey Kryuchenkov. "Technically, it's still weak, also I think the investment community realizes Egypt is probably a temporary thing."
On the physical market, premiums for gold bars were at their strongest since at least 2004 on tight supply and short-covering before the festive season in India and China, as well as physical buying driven by the deadly protests in Egypt.
But the world's largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD-N), said its holdings slipped to an eight-month low of 1,224.118 tonnes by Jan. 28, reflecting a decline in investor desire for bullion.
Holdings of metal in the trust are set for their second-largest monthly decline since the fund's inception in late 2004, while open interest in COMEX gold futures staged its largest weekly fall since at least 1996, according to last week's Commitment of Traders data.
Silver rose 0.3 percent to $27.98, having risen earlier to a one-week high at $28.31. Platinum slipped 0.4 percent to $1,785.34 an ounce, while palladium dropped 0.4 percent to $810.50.