Gold rose over 1 percent in Europe on Wednesday, recovering from the three-week lows it hit in the previous session, as the dollar weakened against the euro on concern selling of the single currency had been overdone. Spot gold was bid at $1,144.95 an ounce at 1600 GMT, against $1,129.30 late on Tuesday. The metal hit a low of $1,125.15 an ounce late in that session as the dollar rose, some 8 percent below the record $1,226.10 it hit on December 3.
The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings fell 13.719 tonnes to 1,116.247 tonnes on Tuesday, their biggest one-day drop since mid-July. Tom Kendall, precious metals strategist at Mitsubishi said gold's bull run was not over, but there was scope for further liquidation for bullion after its breathless rally since end-October.
"I would sum this up as a reality check for the gold market," he said. "We have seen a number of disappointments over the last few days in terms of economic data - Japanese GDP, German industrial production - and a drop in SPDR holdings" he said. "It's going to be a little while before we challenge the highs that we saw last week," he said.
The SPDR gold ETF is the world's sixth largest bullion holder, according to World Gold Council data dated September, ahead of China, Japan and Switzerland. ETFs issue securities backed by physical stocks of an asset such as gold, giving investors exposure to the underlying price. Buying of gold ETFs represented a major tranche of demand earlier this year.
Simon Weeks, head of precious metals at the Bank of Nova Scotia, said while gold had found support, its correction may have further to run. "With the ETFs losing 15 tonnes yesterday, there is definitely some liquidation around at the moment. On the currency markets, the euro rose against the dollar on Wednesday, recovering from its lowest in more than a month after Greece's credit rating was downgraded the previous day.
Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation. Standard Bank analyst Walter de Wet said gold will likely struggle to return to its highs before the end of the year. "We will see more upside in gold, but we don't think we will see it in the next few weeks," he said.
"There are worries about the euro... (and) at the end of the year people have less risk appetite, so overall I can't see people piling into precious metals." US gold futures for February delivery on the COMEX division of the New York Mercantile Exchange were higher at $1,145.80 an ounce versus $1,143.40 an ounce.
Among other precious metals, silver was bid at $17.82 an ounce against $17.59, platinum was at $1,425.50 an ounce against $1,410 and palladium at $366 against $367. Russia's Norilsk Nickel, the world's biggest palladium producer, said there would be no reduction in its platinum and palladium output next year.