LONDON: Gold rose on Thursday, extending the previous day's recovery from four-week lows as investors took advantage of lower prices to buy, though expectations that U.S. monetary policy is set to tighten limited gains.
A tough new round of U.S. sanctions on Russia, which weighed on stocks with exposure to the country, helped send palladium to 13-1/2-year highs. The metal is chiefly sourced from Russia.
Spot gold was up 0.3 percent at $1,302.80 an ounce, while U.S. gold futures for August delivery were up $3.40 an ounce at $1,303.20.
Spot prices fell more than 3 percent over the first two days of this week to their lowest since mid-June, at $1,291.70. Heraeus trader Alexander Zumpfe attributed the rise in prices since then to bargain hunting.
"Overall physical demand is rather low and the actual environment has not changed significantly," he said. "Interest rates in the U.S. are still expected to rise in the foreseeable future, inflation is not in sight, southern European banking jitters are calming down and geopolitical tensions are not looking as if they would spread."
"Currently, gold is trading around its 100-day moving average and I don't rule out that it might firm towards $1,310," he added. "However, a move back below $1,300 and a test of support at $1,285 - the 200-day moving average - appear possible."
Gold has been under pressure after Federal Reserve Chair Janet Yellen said on Tuesday the U.S. central bank could raise rates earlier or faster if hiring and wages take off in an unexpected way.
Higher rates would encourage investors to withdraw money from non-interest-bearing assets such as gold.
Strong U.S. manufacturing and housing data on Wednesday also stoked concerns that a strong economic recovery could prompt the Fed to act soon.
In a sign of waning investor sentiment, SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, said its holdings fell 2.7 tonnes to 806.03 tonnes on Wednesday.
Physical demand in Asian markets failed to pick up in any meaningful way despite the price drop, in what dealers said was another pressure point.
PALLADIUM HITS 13-1/2-YEAR HIGH
The dollar index eased 0.1 percent on Thursday, while the yen hit a five-month high against the euro on renewed safe-haven inflows as the West imposed further sanctions against Russia, weighing on global risk sentiment.
The sanctions struck at the heart of President Vladimir Putin's powerbase by targeting companies closest to him over what Washington says is Moscow's failure to curb violence in Ukraine.
Palladium rallied to a 13-1/2-year high as the sanctions fuelled further buying from investors already expecting supply to struggle to keep pace with demand this year.
Spot palladium peaked at $883.10 an ounce and was later up 1 percent at $879.20. It is the best performing of the main precious metals this year, up 23 percent so far.
"I am forecasting a 1.8 million-ounce palladium deficit this year due to the perfect storm of South African supplies falling to a near-20-year low, growing autocatalyst demand and of course the heavy inflows into the two South African ETFs," Mitsubishi analyst Jonathan Butler said.
"Palladium seems to have got a renewed bout of strength in the last couple of days so we could see it push a little higher in the short term," he added. "Profit-taking at these levels could put a cap on the rally."
Spot platinum was up 0.8 percent at $1,489.50 an ounce, while spot silver was up 0.5 percent at $20.77 an ounce.
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