Gold Slips from Six-Week High

Gold eased on Tuesday after the euro fell following the breakdown of talks over the restructuring of Greece's debt, but the bullion price was still in sight of six-week highs and set for its strongest monthly gain since August.

Negotiations between euro zone finance ministers and private creditors broke down, snuffing out a recovery rally in the euro and denting risk-related assets such as equities.

The Chinese Lunar New Year holiday meant activity in the world's second largest consumer of gold was absent, while activity was muted in top consumer India, where import duties on gold were nearly doubled last week.

The euro's earlier rally to three-week highs against the dollar ran out of steam as investors worried that the race to restructure Greece's debt might not ward off a chaotic default.

Gold's correlation to the euro pulled back from a two-month low, meaning the bullion price was more likely to move in tandem with the single European currency.

Spot gold was last down 0.8 percent on the day at $1,664.26 an ounce at 1530 GMT.

"We needed to take a bit of a breather. Gold has come off a bit in this week in the absence of any kind of physical activity ... There really is a lack of direction as people are still cautious after the December sell-off," Andrey Kryuchenkov, an analyst at VTB Capital, said.

Gold fell by more than 10 percent in December, its second largest monthly decline in 2011 as investor preference for cash over most other assets in the run-up to the end of the year took a toll.

Since then, gold has risen by nearly 7 percent in January, putting it on course for its strongest monthly gain since August's 12 percent rally.

Adding to support for gold was a report on Monday from the World Gold Council reiterating its expectation for central bank purchases of the metal to hit another record in 2011.

"The outlook for central bank gold purchases remains positive for this year, based on the likelihood that emerging markets central banks will continue to diversify away from the U.S. dollar," James Steel, HSBC analyst, said in a note.

"Since U.S. dollar foreign exchange holdings are already at record levels in many countries, we believe these nations will seek to increase gold reserves, in a bid to diversify their USD-laden reserves," he said. "While we do not expect official sector activity to move the market near term, we regard central bank purchases as a bulwark of the long-run gold rally."

Aside from European manufacturing and service sector activity, the U.S. Federal Reserve starts a two-day meeting that is expected to yield policymakers' forecasts for both the economy and for interest rates in the longer term.

A Reuters poll of leading Wall Street economists shows most expect the Fed to signal that its policymakers do not expect to start raising rates until the first half of 2014, more than five years after cutting them to zero.

A protracted period of low U.S. interest rates is generally favourable for gold, which tends to gain more of a competitive advantage against yield-bearing assets such as stocks or bonds when monetary policy is very loose.

In other precious metals, silver was down 0.4 percent on the day at $32.18 an ounce, yet remained the strongest performing precious metal so far in January with a 16 percent gain, compared with a 6.7 percent gain in gold and a 4.0 percent gain in laggard palladium.

Palladium fell 0.6 percent on the day to $680.50 an ounce, while platinum fell 0.8 percent to $1,543.60 an ounce.

The platinum price has risen by 11 percent this month, driven largely by concerns about possible supply disruptions from power restrictions in top miner South Africa and from industrial action under way at two key plants.

Workers at Impala Platinum's operations near Rustenberg in South Africa downed tools late last week in protest over wages, which the company said would cost it 3,000 ounces of platinum a day in lost production, while employees at its Zimplats unit in Zimbabwe also went on strike. (Editing by James Jukwey)