In recent times, bullion has moved in close correlation with other riskier assets
Gold prices fell as much as 1.1 percent on Wednesday, tracking the euro lower on fears the euro zone debt crisis could spread to France, the bloc's second-largest economy, while Greece and Italy battle to save their economies.
People favour gold during economic and political turmoil because of its safe haven allure, although bullion has moved in close correlation with riskier assets recently, as harried investors liquidate gold positions to cover losses elsewhere.
France came under heavy fire in global markets on Tuesday, reflecting fears that it is being sucked into a spiralling debt crisis.
Italian bond yields rose back above 7 percent, a level seen as unsustainable, and Spanish bond yields hit a 14-year high.
"That tells you that things are not OK," said Dominic Schnider, head of commodity research at UBS Wealth Management in Singapore. "It will give gold some support, although the dollar is putting some pressure."
Spot gold fell 1.1 percent to $1,761.74, but recovered to $1,768.10 by 0706 GMT. US gold also dropped 1.1 percent, and regained some lost ground to $1,769.80.
Technical analysis suggested that gold could rise to $1,829 an ounce during the day, said Reuters market analyst Wang Tao.
Investors are watching the European Central Bank for potential bond buying action to help the heavily indebted euro zone states.
"This decision will come up in the first quarter when a huge amount of maturing debt will need to be financed," said Schnider, adding that large bond purchases would help boost gold prices.
Asia's physical gold market lacked excitement, as bullion prices were trapped in a tight range over the past few days.
"The dollar strength has weakened local currencies, which has tempered buying interest," said a physical dealer in Singapore.
Gold priced in Indian rupees rose to a record of 90,537.13 rupees per ounce this week, while dollar-denominated gold languished about 8 percent below its record of $1,920.30 hit in early September.
Palladium will show its biggest market surplus in four years in 2011, as sales of Russian stocks and disinvestment outweigh record autocatalyst demand, while a rising supply of platinum will outpace Chinese jewellery demand and industrial consumption this year and next, according to refiner Johnson Matthey.