Gold rose on Tuesday after a wave of risk aversion due to growth worries in China and rising tensions in the Middle East triggered demand for the metal. Spot gold was up 0.3 percent at $1,077.75 an ounce by 1514 GMT. On Monday, the metal jumped by as much as 2.2 percent to a four-week high of $1,083.30 after data showed Chinese factory activity contracted for a 10th straight month in December. "More weakness in China ... would be more positive for gold but investors would need to see more evidence of systemic issues there, which is still unlikely," Julius Baer analyst Carsten Menke said.
"That could be the only longer lasting upside for gold in an otherwise bearish outlook due to sound growth in the US and lack of inflation risks." A 7 percent slide in Chinese shares on Monday sparked by weak economic data rekindled worries over global growth on the first day of trading in 2016, and sent European and US stocks diving.
China stocks swung in and out of negative territory on Tuesday, while European indices rebounded. Bullion, often seen as a alternative investment in times of political and financial uncertainty, is also benefiting from a shift away from risk along with the Japanese yen and US bonds. Saudi Arabia's execution of a Shia Muslim cleric over the weekend provoked protests among Shias across the region. Saudi Arabia also said it would end air traffic and trade links with Tehran.
Safe-haven rallies tend to be short-lived and gold could see the focus shift back to US monetary policy soon. Gold slid 10 percent last year on fears that higher US rates would lower demand for the non-interest-paying asset, while boosting the dollar. A stronger greenback makes dollar-denominated gold costlier for holders of other currencies.
"We started 2016 speculating on the trajectory of the US interest rates and the direction of the dollar...these factors have faded a bit at this stage but will come back as a bearish factor," SaxoBank's Hansen said. San Francisco Federal Reserve President John Williams said on Monday he is unfazed by the weak economic data out of China that has spooked Wall Street, and sees three to five US interest rate hikes this year as reasonable given the strength of the US economy.
Investor sentiment remains bearish. Hedge funds and money managers boosted their net short position in COMEX gold to a fresh record in the week to December 29, US government data showed on Monday. Silver rose 0.6 percent to $13.93 an ounce, having ended 2015 down 11.7 percent. Among industrial metals, platinum was up 0.4 percent to $890 an ounce and palladium gained 0.3 percent to $539.53, after falling more than 4 percent on Monday.