LONDON Gold rose around one percent on Wednesday as the market's extraordinary slide to two year lows prompted more physical buying interest from Asia, but sentiment was still severely shaken by the biggest two-day loss in 30 years.
Investors continued to exit exchange-traded funds, concerned that the metal has lost its shine as a safe haven and inflation hedge.
Gold rose 1.1 percent to $1,383.15 an ounce by 1045 GMT, having tumbled to its lowest since January 2011 at $1,321.35 on Tuesday. The market fell by a combined $225 on Friday and Monday. This compares to a total range of $260 in 2012.
It has fallen about 18 percent so far this year after an unbroken 12-year string of gains.
"We bounced a little bit in the past two sessions and I suspect there was quite a good buying coming out of Asia, from places like China and potentially India," Natixis analyst Nic Brown said.
"I think that at this point a new range will be established, we can't go back to the old $1,500-$1,580 range because investor sentiment has fallen, but it still early days to understand at which levels people will feel they can sell again."
Asian physical buying pushed up premiums for gold bars in Singapore to their highest in 18 months at $1.70 an ounce to spot London prices, but demand from top consumer India was surprisingly low despite the wedding season, traders said.
India celebrates Akshaya Tritiya, a key gold-buying festival, next month, while the wedding season will continue until early June. Indian parents typically give gold jewellery to their daughters when they marry.
In wider markets, European shares sank by over one percent as investors positioned for sluggish growth in the euro area and ongoing monetary policy easing in the U.S. and Japan.
U.S. GOLD FUTURES FALL
U.S. gold futures, which sometimes dictate spot gold prices, slipped 0.3 percent to $1,383.80 an ounce influenced by investors dropping more holdings of gold-backed exchange-traded funds and as the contract caught up with a recent sell-off in the cash market.
Holdings in the SPDR Gold Trust, the world's largest gold-backed ETF, fell 0.73 percent to 1,145.92 tonnes on Tuesday from 1,154.34 tonnes on Monday. Holdings of global gold ETFs are currently at their lowest since late 2011.
Worries are also festering that other indebted euro zone countries could follow Cyprus' plan to sell bullion reserves to raise cash after the island's finance minister Harris Georgiades anticipated the sale within the next few months.
"The market is absorbing the negative impact of the Cyprus gold sale news, it is a disproportionate response to what is a relatively small amount of gold, but is more to do with setting a precedent and if selling gold becomes part of any European bailout you have to look at how much metal other countries' central banks hold," Natixis' Brown said.
Credit Suisse downgraded its 3-month outlook to negative, and expects prices of $1,300 in the next three months.
"Over a 1-6 month time horizon, risks remain to the downside, given the negative trend and merely neutral fundamentals," it said in a report.
Tokyo gold futures regained strength as the yen weakened, the Nikkei rebounded and physical gold buying picked up. The most active contract, currently February 2014, sank to its lowest since August on Tuesday.
In other precious metals, platinum and palladium fell on news that demand for new cars in the European Union declined for the 18th consecutive month in March, down 10.2 percent to 1.3 million.
Spot platinum fell 0.7 percent to $1,433.74 an ounce, having touched its lowest since last August in the previous session. Palladium was dowm 0.2 percent to $676.
Silver was little changed at $23.39 an ounce after dropping 12.6 percent on Monday.
(Additional reporting by Lewa Pardomuan in Singapore; Editing by Veronica Brown)