Gold rose 2.5 percent on Tuesday, recouping all of last week's losses that pushed it to the brink of a bear market, as encouraging US manufacturing data sparked rallies in the euro and the equities markets.
While bullion started 2012 on a positive foot, with its largest daily rise since November 7, traders cautioned it remains vulnerable from a technical standpoint as long as it trades below $1,630 an ounce.
“I still think that gold is in a bear-market rally as opposed to a true change. If we can clearly rise above the 200-day average, that will confirm that we have turned around again,” said Frank McGhee, head precious metals trader of Integrated Brokerage Services LLC.
Gold was moving in lockstep with the euro, after positive data from China and Germany suggested global economic recovery was gaining steam. Silver was also up nearly 7 percent, its biggest one-day rally since November 2008.
Last week, the metal was briefly 20 percent below its record September high, the common definition of a bear market. It had lost as much as 11 percent in December, pressured by year-end liquidation by hedge funds and technical selling below a key support.
Spot gold was up 2.5 percent at $1,604.69 an ounce by 2:58 PM EST (21:58 SA time).
US gold futures for February delivery settled up $33.70 at $1,600.50 an ounce.
Trading volume was about two-thirds of its 30-day average, but above the average turnover in holiday trade last week when bullion was down 2.5 percent.
“With the sell-off that we had based on very low volume to end the year, a significant amount of bargain hunting is coming in at those lower prices,” David Meger, director of metals trading at futures brokerage Vision Financial Markets.
Gold's next critical resistance will be its 200-day moving average at around $1,630 an ounce. The metal had held the technical support for almost three years until December 14.
A $4 rally in crude oil futures on rising tensions between Iran and the United States and surging grain prices also supported gold's gains.
Silver rose 6.3 percent to $29.54 an ounce.
Gold followed the 2 percent gain in the S&P 500 index after data showed the US factory sector expanded at its fastest pace in six months in December.
Bullion posted a gain of 10 percent for 2011, its smallest annual rise in three years. It remains down 16 percent from a record $1,920.30 set in September, and finished the fourth quarter with its first quarterly loss in more than three years.
GOLD, EURO IN LOCKSTEP
Analysts said gold was also lifted by expectations of possible new market stimulus ahead of a meeting by France and Germany next week to resolve the euro zone debt crisis.
The 25-day correlation between bullion and the euro was at around 0.8, a near-perfect positive link and highest in a year.
“I would say it all really depends on the euro for the time being. This is really where gold takes its cue from,” RBS commodities analyst Nikos Kavalis said.
Jim Rogers, who co-founded the Quantum Fund with George Soros in the 1970s and is a well-known commodities bull, also said he expects gold will drop further given the run-up over the last 10 years.
“In my view, gold could go to $1,200-$1,300 (an ounce)... Gold has been up 11 years in a row which is extremely unusual in any financial asset so gold is overdue for a correction,” he said.
In other precious metals, platinum rose 2.2 percent to $1,424.49 an ounce and palladium rose 1.8 percent to $661.80 an ounce. - Reuters