LONDON, Aug 23:Gold prices drifted higher on Wednesday to trade in a tight $5 band, with investors watching oil and currency markets for direction, dealers said. Gold rose as high as $625.25 an ounce before retreating to $624.70/626.20, against $623. 70/624.50 in New York late on Tuesday, when it hit a high of $628.50.

I don't expect a huge amount of movement until we are back from holidays in September, said Simon Weeks, director of precious metals at ScotiaMocatta.

Despite the physical interest that came in at the lower numbers, there still seems to be a lot of metal around and (there are) not enough buyers to take up that excess liquidity.

Traders said short-term price moves would largely depend on changes in oil prices and the dollar, while the situation in the Middle East would be keenly watched.

The euro staged a modest recovery against the dollar after falling sharply in the previous session when a closely watched German ZEW business sentiment index hit its lowest in five years.

Since the dollar has played the leading role for gold lately, the focus today should be on US housing market data, Dresdner Kleinwort said in a daily note.

The consensus expects a significant decline in home sales as a further sign of the slowdown of the US economy.

Dollar weakness could bring back buyers to the precious metals market but weaker oil prices might neutralise this effect. Oil fell below $73 a barrel as world powers studied Iran's offer of more talks to resolve a nuclear dispute that could lead to sanctions against the fourth largest oil exporter.

Iran said its reply to the powers' nuclear incentives offer contained ideas that would allow serious talks about its standoff to start straight away. France said world powers would take a few days to assess the response.

Oil and the dollar will still look to provide much of the...direction, while the thin holiday market conditions will hold gold between $600-$655.

In other precious metals, palladium rose $1 to 340/345 an ounce, just below its highest since June 7 at $343.50 on Tuesday. Platinum eased to $1,225/1,230 an ounce from $1,227/1,232 late in New York.

Silver edged up to $12.35/12.45 an ounce from $12.21/12.31 late in the US market.—Reuters