Gold rebounded on Thursday as buyers were tempted back to the market by the previous day's 5 percent price plunge, its biggest one-day drop since October 2008, after Federal Reserve Chairman Ben Bernanke gave no hints of a third round of quantitative easing.
Prices failed to gain much traction as they rose, however, retreating from an early high of $1,724.76 an ounce as the euro surrendered gains against the dollar, declining further after dollar-supportive US economic data mid-afternoon. Spot gold was up 0.8 percent at $1,708.04 an ounce at 1437 GMT. Spot prices fell more than 5 percent on Wednesday as expectations for further easing in the world's biggest economy, which had been a key support of gold prices, faded.
Bullion's healthy bounce from lows and broader support offered to the market by low interest rates and high liquidity suggests prices may steady from here, however. "In our view, the recent correction is temporary and does not question the mid- or long-term upward path of gold," BNP Paribas analyst Anne-Laure Tremblay said. "We may test $1,700 an ounce, but I would be surprised if we broke this level durably."
In key Asian physical gold markets overnight, jewellers, traders and investors rushed to take advantage of the nearly $100 drop in prices. "It's been a long time since we (saw) such decent buying," said one Hong Kong-based dealer. "We've seen physical flows coming off steadily since the beginning of February," said Standard Bank analyst Walter de Wet. "Physical demand is just not there when gold is at $1,750-$1,800, and you really need that on top of the financial demand to push gold much higher."
Investment in gold-backed exchange-traded products, which issue securities backed with physical bullion, also rose on Wednesday, with holdings of the largest, New York's SPDR Gold Trust, up just over nine tonnes. A lack of demand for physical bullion in recent weeks meant gold had little additional support once selling got underway on Comex, after Bernanke's remarks. "We think a large part of why gold conceded so much came down to three other factors - $1,800 was proving to be too much of a hurdle and a certain staleness had entered the market; positioning had increased very swiftly in recent weeks; and physical demand has been non-existent," said UBS in a note.
"What the physical community do from here is hugely important," it added. A recovery in other markets, many of which also suffered heavy losses on Wednesday, helped gold in early trade, although it softened as the euro gave up gains midmorning. It fell to a session low against the dollar after data showed new US claims for unemployment benefits edged down last week, holding near four-year lows, suggesting the labour market recovery was gaining momentum.
European shares reversed early losses to move higher, with investors cheered by this week's ECB cash injection on the banking sector. US gold futures for April delivery were down $2.60 an ounce at $1,708.70 Among other precious metals, silver was up 0.4 percent at $34.74 an ounce. It also fell more than 6 percent on Wednesday. The gold/silver ratio, the number of silver ounces needed to buy an ounce of gold, jumped to 49.4 from a five-month low of 48.4 on Wednesday.
"Silver did manage to hold its short-term uptrend support, off the December 29 low, currently around 34.37, on a closing basis," said ScotiaMocatta in a note. Spot platinum was up 0.6 percent at $1,685.49 an ounce, while palladium was up 0.2 percent at $699.97.
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