Spot gold rose on Thursday, rebounding from sharp falls in the previous session on short covering and a weak dollar, but prices hovered near 2-1/2 month lows as intensifying worries about the euro zone debt crisis prompted investors to remain cautious.
The precious metal has lost 9 percent of its value this month, on track for its first monthly fall since September and weakest December since 2008 when the global credit crunch was at its worst.
Although gold is regarded as a safe haven asset to shield investors in times of uncertainty, it has increasingly become prone to pressure from the wider financial market, moving in tandem with other assets as investor sentiment remains fragile.
Spot gold was up 0.8 percent at $1,587.49 an ounce as of 12:51 SA time, after posting its biggest one-day decline in nearly three months on Wednesday on pessimism about the euro zone and liquidation of positions by funds.
It hit a session low of $1,564.14, close to a 2-1/2 month low of $1,564.05 touched a day earlier.
US gold rose 0.4 percent to $1,591.10 an ounce.
“With the sharp falls we have seen (yesterday) there is a bit of short covering. The strength of the bounce, however, has been rather modest because the gold market tends to quieten down quite rapidly from the beginning of December,” Ross Norman of Sharps Pixley said.
“At the moment gold is moving in tandem with the euro and in the short-term currencies will continue to be the main driver for gold. It's all about the US dollar.”
The euro rebounded from 11-month lows hit against the dollar in the previous session, with a weak US currency benefitting commodities priced in the currency.
Prices are prone to volatile moves at the end of the year on thinning liquidity as many have closed their books for the year and moved to the sidelines of the market, waiting for a fresh start in January.
TECHNICALS EYED
Prices broke below the 200-day moving average in the previous session, seen as a bearish signal for the market, but technical analysts said it might be too early to suggest its bull trend was over.
The relative strength index on spot gold remained below 30, for a second session in a row, indicating an oversold market which could attract some buying.
Helping ease some immediate concerns about the euro zone debt crisis, Spain saw solid demand for medium- and long-term bonds, paying over 2 percentage points less to issue a 5-year bond than Italy this week.
Despite the steep decline in gold prices, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, were unchanged at 1,294.796 tonnes by December 14.
“Investors with a medium- and long-term view are remaining loyal to gold, and gold ETFs are still showing no outflows. In our view, bargain hunters are soon likely to take advantage of the low price levels,” Commerzbank analysts said in a note.
On the economic front, the decline in the euro zone's private sector eased a little this month, but a recession still looks inevitable with the region's periphery struggling badly, a key business survey showed.
In China, economic growth could be slowing further as data on Thursday showed the first year-on-year drop in foreign direct investment in 28 months and a fresh fall in new orders signalled a further contraction in factory activity.
Spot platinum tumbled as much as 3.2 percent to a two-year low of $1,372, before trimming some losses to trade at$1,399.10
Spot silver dropped to $28.10, its lowest since late September, before rebounding to trade at $29.02. The metal has fallen about 10 percent so far this week, pushing the year-to-date performance into the red.
Palladium rose 0.4 percent to $616.22 an ounce. - Reuters