Gold prices rose back above $1,340 an ounce in Europe on Wednesday, recovering some of the previous session's hefty losses, as the dollar ceded ground to a basket of currencies after its move higher.
Spot gold was bid at $1,342.10 an ounce at 1114 GMT (7:14 a.m. EDT), against $1,336.00 late in New York on Tuesday, while U.S. gold futures for December delivery rose $6.50 an ounce to $1,342.60. Spot prices hit a record $1,387.10 last week.
The precious metal fell 2.5 percent on Tuesday, its biggest one-day loss since July 1, after China opted to raise its benchmark interest rates by a quarter-point, sparking a rally in the dollar.
But it has met with good buying since the correction. Market watchers are still looking ahead to a Federal Reserve policy meeting on November 2, at which the bank is expected to discuss the prospect of extending its quantitative easing program.
"What we saw yesterday was more of a panic selling in response to the surprise rate hike by China," said Richcomm Global Services analyst Pradeep Unni. "Fundamentally however, nothing has changed...and the weakness in the dollar persists."
"Markets are waiting for the quantity of quantitative easing by the Fed," he added. "Bargain hunters are likely to... (use) this dip as a buying opportunity. As long as gold holds above the $1,329 mark, it's likely to recover to $1,351-$1357."
The dollar index, which measures the U.S. unit's performance against a basket of currencies, eased 0.5 percent in early trade as appetite for higher-yielding currencies stabilized after China's surprise interest rate hike.
Gold typically moves in a close inverse relationship with the dollar, with strength in the U.S. unit curbing gold's appeal as an alternative asset and making dollar-priced commodities more expensive for holders of other currencies.
Tuesday also saw a further decline in holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, which fell by nearly 1 ton, its tenth daily outflow in 16 sessions.
PHYSICAL DEMAND EXPECTED
Gold's descent is expected to meet physical buying from traditional bullion markets like India, the world's biggest consumer of gold, however.
"It is in the trading sessions subsequent to an investor stampede for the exit that physical demand becomes very important," said Swiss bank UBS in a note.
"We would look for it to accelerate today. Early indicators are quite positive with physical demand from Asia ex-India initially in the low $1,330s helping to put a floor under gold around that level."
Silver was at $23.71 an ounce against $23.32, having also slipped by the most since July 1 on Tuesday with a 4.1 percent fall. It is still one of the biggest climbers of the precious metals so far this year, up 41 percent.
Platinum was at $1,677.49 an ounce against $1,667.50, while palladium was at $579.99 against $573.08.
The white metals also fell on Tuesday in gold's wake, but analysts say their firm underlying fundamentals are expected to lend support.
Demand for the auto catalyst metals is expected to improve this year as the car industry continues its recovery, while mine supply in South Africa is expected to be constrained.
"Demand (for platinum) from auto catalyst producers has been rebounding this year," said Bank of America-Merrill Lynch in a report. "We forecast a deficit for 2010 and 2011."
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