Gold-bugs had a rocky ride in Europe on Thursday, with the market swinging wildly lower when China raised interest rates only for fresh dollar woes to ignite a smart rally, traders said.
"It has been hectic and volatile - after it sold off on the China (rate) increase it did not take much to move it back up when the dollar tumbled," a trader said.
The US currency slid to fresh seven-month lows against the euro of $1.2547 after Federal Reserve Chief Ben Bernanke hinted at a US rate hike pause.
Spot gold rallied strongly from lows of $628.20 to close at $641.70/642.70 a troy ounce, against $640.10/641.10 late in New York on Wednesday, bringing last week's 25-year high of $645.75 back into play.
Traders said the rise in China's one-year lending rate to 5.85 percent from 5.58 percent was seen by economists as an attempt to slow a boom in credit and investment growth.
"We have seen several times in the past this kind of China news having a short term impact on the metals markets in particular, before buyers come into the dips," said Julia Hamblett, trader at Dresdner Kleinwort Wasserstein.
Stephen Briggs of SG Corporate and Investment Banking said that China had become a major element in the overall commodity bull run so that anything to do with China provoked a reaction, even though it was much less relevant for gold.
"But all commodities are the same now. There is something called 'commodity' and another called 'China' and the two go together," Briggs added.
Despite Thursday's gyrations, analysts said gold is still ranging broadly, with Middle East tensions, the weak dollar and expectations of further fund buying keeping the bull-market intact.
Gold, bought for jewellery and as an investment, is pausing after a frenetic speculative rally swept all precious metals to new heights.
Gold has risen as much as 25 percent this year as investors diversify into precious metals on record oil prices and unease over Iran's nuclear ambitions.
"There isn't that much investment buying around - it is more physical at the moment...$645/650 might be a bit difficult at the moment," a senior trader said.
Over the longer term the market is seen extending the rally for at least another two to three years, supported by strong physical and investment demand, supply constraints and world political tensions, a fund manager said on Thursday.
"I don't see any reason why it shouldn't continue for two to three years...It will take a very long time for mine production to ramp up," Richard Davis, director of natural resources at Merrill Lynch Investment Managers, told Reuters.
In other precious metals, silver jumped from its lows, bolstered by news the Barclays iShares Silver Trust had been declared effective by the US Securities and Exchange Commission.
Spot ended at $12.96/13.06 an ounce, against $12.92/13.02 in New York, well above a $12.30 low, but still off a 23-year peak of $14.68 hit last week.
The metal has risen as much as 67 percent this year on expectations that the new exchange-traded fund from Barclays Global Investors would lift demand for the metal used in jewellery, photography and dentistry.
Platinum, used in auto-catalysts to reduce noxious exhaust emissions, hit a record $1,147/1,152, up from $1,133/1,138 late in New York.
Palladium was at $362/367 an ounce from $363/368.
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