(Reuters) - Gold prices eased off two-week highs on Tuesday as buying ahead of the COMEX March options expiry waned and the market tracked a weaker euro.
In early trading, interest ahead of the options expiry had pushed gold just $4 shy of $1,700 an ounce, but prices weakened to an intraday low as the dollar strengthened by the afternoon in New York.
Prices held above the 100- and 200-day moving averages they had breached the previous day after Federal Reserve chairman Ben Benanke signaled U.S. interest rates would stay low. Low rates would maintain the low opportunity cost of holding bullion.
Spot gold was at $1,684.60 an ounce at 1:55 p.m. EDT (1755 GMT), down $7.14 or 0.42 percent, after hitting a two-week peak at $1,696.20 earlier in the day.
U.S. gold futures for April delivery settled at $1,684.9 per ounce, down slightly from Monday's settlment of $1,685.6.
With most call and put options concentrated around $1,700 an ounce, expiry passed without incident, with no buying materalizing to provide any upside momentum.
"They will expire without drama. $1,700's going to be a psychological resistance," said Sean McGillivray, vice president and head of asset allocation at Great Pacific Wealth Management.
Daily volume of 150,000 lots, equivalent to 15 million ounces, was average, although the drop to a day low of $1,681 sparked a spike in volume, with over 2,300 lots traded in a minute.
And activity levels so far this month have been higher than the previous months too.
With three days until the end of the month, volume is already at 3.13 million lots, close to exceeding February's level of 3.2 million lots.
That would be the highest monthly volume since September last year, the month when prices hit its record of $1,920 per oz before plunging almost $400 by the end of the month.
Gold surrendered its early gains in line the euro which lost ground against the dollar as a two-day rally petered out. The precious metal tends to benefit from weakness in the dollar, which makes it cheaper for holders of other currencies.
Monday's rally was triggered when Bernanke said the U.S. economy needed to grow more quickly to cut the unemployment rate. While he did not directly indicate the Fed was set to begin another round of bond purchases, he said a continuation of accommodative policies was needed to support faster growth.
Appetite for assets seen as higher risk mostly held firm after strengthening the previous day. World stocks touched an eight-month high on the back of Bernanke's comments and on expectations the euro zone would agree to a bigger crisis firewall, while oil held above $125 a barrel.
"Our economists believe that the market has been too aggressive in pricing in Fed rate hikes in 2013, while the Fed is more likely to push the hikes out to 2014 as indicated by the speech," said Barclays Capital in a note.
"We believe low interest rates and longer-term inflationary pressures should remain supportive for gold prices."
ETFs RECORD INFLOWS
Gold exchange-traded funds, which issue securities backed by physical metal, reported inflows on Monday. Holdings of the largest, New York's SPDR Gold Trust, increased by around 6 tonnes, reversing some of the previous week's 10 tonne drop.
Demand for the yellow metal in major consumer India remained subdued, however, as a strike continued among jewellers in protest at a government import levy.
"There is valid concern over Indian gold demand, which may decline on the back of higher domestic taxes on the gold industry," said Standard Bank in a note. "Indian buying has been notably weak as the strike by jewellers drags on for the 11th day today."
Silver was down 0.58 percent at $32.64 an ounce. Spot platinum was up 0.60 percent at $1,652.49 an ounce, while spot palladium edged down 1.3 percent to $654.5.
Platinum maintained an historically unusual discount to gold as buyers worried about demand for the white metal, which is chiefly used in autocatalysts.
Platinum prices are up more than 18 percent this year after a poor performance in 2011 but have struggled to maintain traction as worries persist over growth in the euro zone, a major market for platinum-heavy diesel autocatalysts.
(Editing by Jane Baird and David Gregorio)