Gold steady after S&P downgrade warning

Spot gold traded steady on Tuesday, after posting its biggest daily loss in two weeks in the previous session on fears of a possible mass credit rating downgrade for euro zone nations by Standard & Poor's.

The ratings agency announced the warning just as the leaders of France and Germany agreed a master plan involving treaty change to impose budget discipline across the euro zone, ahead of the key European Union summit on Friday.

Lack of swift action on the two-year-old euro zone debt crisis would not only split up the 17-nation single currency bloc, but also endanger the global economy.

"The two far-reaching events later this week combined with the year-end factor - it's a recipe for thin trade and potentially volatile trade," said Nick Trevethan, senior commodities strategist at ANZ in Singapore.

Besides the European Union summit, investors are also watching the rate decision by the European Central Bank on Thursday.

Many traders have closed books to lock in profit before the end of the year, reducing liquidity in the market.

The dollar index edged higher at the expense of the precarious state of the euro, weighing on dollar-priced commodities.

Spot gold was little changed at $1,720.26 an ounce by 0255 GMT, after a 1.4 per cent drop in the previous session.

On the chart, spot gold traded below the 100-day moving average at $1,726.38, which it broke below in the previous session.

US gold lost 0.6 per cent to $1,724.20.

Asia's bullion market remained in thin trade as well, as the volatility and lack of clear direction deterred buyers.

"The market is very slow, and we don't see much demand from Thailand, Indonesia or even India," said a Singapore-based dealer. "The weak rupee in India has pushed up buying costs a lot and effectively stopped buyers."

The premium on gold bars in Singapore remained around $1 an ounce over spot prices, the dealer added.

"While the volatility in the market persists, physical market players will remain aloof and shy, waiting for things to settle down and clear direction to come out before they re-enter the market," said Trevethan of ANZ.

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, stayed unchanged at 1,297.929 tonnes by December 5, just below a nearly four-month high of 1,298.534 tonnes hit on November 30.