Gold stabilised on Thursday, as U.S. Treasury yields fell for the first time in three days, a day after a sharp sell-off that knocked the bullion price from a record high to one-week lows.

This week's quarter-point rise in 10-year Treasury yields to six-month highs has boosted the dollar and unnerved investors over the near-term impact of Washington's tax plans on domestic finances and inflation.

As the dollar has benefitted from greater yield appeal and the perception that the U.S. government's efforts will result in longer-term growth, gold has come under pressure, and is set for its largest weekly fall since late October, having hit record highs earlier this week.

Spot gold XAU= was last quoted at $1,381.30 an ounce at 1034 GMT, little changed on the day, having fallen for two consecutive days. U.S. February gold futures GCG1 were down $0.50 an ounce at $1,382.90.

"Dollar strength is certainly hurting gold and also I think ongoing signs that things are steadily improving and yes, the (tax) package of Obama's is a concern because maybe they're spending money they don't have, but it will help activity," said Citi analyst David Thurtell.

"If countries in the peripheral euro zone and the U.S. can show that they have a long-term plan to fix things, markets will become much more accepting of short-term spending," he said.

The so-called opportunity cost of owning gold -- the yield investors forfeit for holding a non-interest bearing asset -- rises in tandem with bond yields and investors have seen that cost automatically spiral this week as Treasuries have fallen.

Gold hit a record high of $1,430.95 on Tuesday, fuelled by a flurry of fund-buying ahead of the year-end and a resurgence in risk aversion stemming from Europe's deepening debt crisis, which has pummelled the government bonds of the euro zone's most economically fragile members.

With the 3 percent decline seen over the last three days however, physical demand has resurfaced, particularly in Asia, where premiums for physical delivery in Hong Kong held steady, while scrap supply was muted.

"Interestingly we don't see too much gold scrap falling back into the market, after price hit record high. Everybody is still bullish," said Dick Poon, manager of precious metals at Hareaus in Hong Kong.

Poon said physical buying from manufacturers has subsided, while investors, betting on further price rise, continued to buy on dips.

"Stabilization Thursday has been due in large part to impressive physical demand, with very decent buying across Asia yesterday," wrote UBS strategist Edel Tully in a note.

"In India alone, our physical sales made Wednesday one of the top ten days this year, with demand accelerating once gold fell below $1,390. This should provide longs with some comfort."

Reflecting the lack of appetite for gold this week was a fourth successive decline in holdings of metal in the SPDR Gold Trust (GLD), the world's largest exchange-traded fund backed by physical bullion. [GOL/SPDR]

Spot silver XAG= rose 0.2 percent to $28.36 an ounce, after declining to a one-week low of $27.96 in the previous session.

Platinum XPT= eased modestly, down 0.2 percent on the day at $1,678.49 an ounce, while palladium XPD= rose 1.4 percent to 734.22, taking some heart from the rise in other industrial commodities such as crude oil and base metals. [O/R] [MET/L]


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