Gold rose almost one percent in afternoon trade on Monday as the metal's fall towards a recent eight-week low on a firmer dollar attracted buying from physical traders and investors.
Gold fell as low as $602.50 an ounce, down 17 percent from last month's 26-year high of $730, before bouncing back. But dealers said gold was vulnerable to further losses due to bearish market sentiment prevailing.
"The price drop tempted bargain-hunters and physical players to put their money into the market at these levels," said James Moore, precious metals analyst at TheBullionDesk.com.
"We need to find a base and hold $600. If we don't hold, then prices may potentially go back to the $585-$575 area." Spot gold rose as high as $611.40 and was last quoted at $610.80/611.50 by 1440 GMT, compared with $605.45/606.45 in New York on Friday, when it fell to its lowest since mid-April.
Prices had come under pressure because of heavy selling on recent dollar strength, a drop in oil prices and some easing in geopolitical tensions, but the bullion market was still about 17 percent higher from the start of the year.
"The long term (trend) is still very positive. We see this as a healthy correction, not a reversal. We don't think the rally has ended," said Robin Bhar, analyst, UBS Investment Bank. The gold price might go as high as $1,000 in the next few years after rollercoaster commodity markets took time in the short term to settle down, Toronto-based Charles Oliver, manager of a top-performing UK-based mutual fund, said.
The dollar hit a one-month high against major currencies, helped by investors bailing out of one-way bets against the greenback in light of increased expectations for the US Federal Reserve to raise interest rates again.
Investors usually buy gold as a hedge against a weak dollar and sell when the market moves in the opposition direction.
"On the upside, gold needs to break and hold above $620 to move out of the current downtrend," said Julia Hamblett of Dresdner Kleinwort Wasserstein.
John Meyer, analyst at Numis Securities said a recovery in prices was likely from August as jewellery manufacturers generally started stocking gold in preparation for festivals and Christmas and investors looked more closely at their portfolios.
In other markets, copper recovered from a sharp Asian selloff, but analysts said investors were wary of taking risks in volatile commodity markets.
Oil, whose price has fluctuated wildly recently, was steady as concern eased that the first named storm of the Atlantic hurricane season would disrupt US oil production and refining facilities.
"At times when commodities are in a major downward correction phase and when stocks are falling, investors want to lock in their profits from commodities and shift those proceeds into deposits or into bonds until they can fully determine the trend," said a senior trader at a Japanese trading house.
In other precious metals, silver slipped to a 10-week low of $11.02 an ounce before rising to $11.18/11.28, against $11.14/11.24 late in New York.
Platinum fell to a one-month low of $1,170 an ounce but later rose to $1,175/1,179, against New York's level of $1,188/1,193.
Palladium was unchanged at $317/322 an ounce.
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