Bargain-hunters and physical buyers returned to the bullion market on Friday, spurring a rally in the price of gold after it fell to its lowest since mid-April in early trade on a firmer dollar, analysts said.
At its lowest point, gold was down by about $125, or 17 percent, from its 26-year high of $730 an ounce on May 12. Gold took about a month to add $100 to reach the peak, but wiped out those gains in just two weeks.
"It's a bounce back from the recent rather savage declines that we have seen. There doesn't appear to be quite enough carry-over selling to push the market down to the $600 level," said James Steel, analyst at HSBC Bank.
Gold dropped to an eight-week low of $603.50 before jumping to $616.40/617.10 by 1403 GMT, against $609.50/610.20 in New York late on Thursday, when it fell about three percent.
Gold gained support from a rise in oil towards $71 a barrel as violence continued unabated in Iraq, dashing some hopes that the killing of a top al Qaeda leader would turn the tide for the country's struggling oil sector.
The metal is often seen as a hedge against inflation.
"We need a period of stabilisation and it (gold) can go up again. Fundamentally nothing has changed. People will continue to look for diversification in their portfolios and gold has a role in that," Wolfgang Wrzesniok-Rossbach, head of precious metals marketing at Germany's Heraeus, said.
"Overall it is just a reflection that the previous rally was overdone. We are coming back to a more normal situation and that means we shouldn't go from super-bullish to super-bearish, but basically wait for this selling to bottom out at some stage."
"For the short term, the perceived easing in Middle East tensions, as well as dollar recovery, look set to drag the precious complex lower and could potentially lead below $600 next week," said James Moore, analyst at TheBullionDesk.com.
In other markets, metal prices on the London Metal Exchange rose with European shares in Friday's mid-session after sharp losses on Thursday.
European shares rebounded as investors scooped up mining and construction stocks and other shares that have suffered from sharp losses in recent sessions as investors fretted about economic prospects.
"We will not recommend tactical long positions in precious metals until either strong physical demand is seen, heavy speculative buying returns or the US dollar resumes its weakening trend," said John Reade, analyst, UBS Investment Bank.
"The only metal we recommend buying now is platinum, where supply and demand fundamentals remain strongly supportive."
Spot platinum was at $1,199/1,207 an ounce, up from $1,187/1,193 in the US market.
Silver rose to $11.42/11.52 an ounce from 11.09/11.19 in New York, while palladium increased to $324/329 an ounce from $313/319.
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