Gold rose on Tuesday as comments from China calmed concerns about a credit crunch there, taking pressure off commodities and equities, but the prospect of an end to U.S. Federal Reserve easing kept bullion near three-year lows.
The metal was caught up in selling on the wider financial markets earlier as Chinese shares fell deeper into bear market territory on fears of a cash crunch, dragging down other stock markets, oil and metals.
Commodities recovered in Europe and shares rose more than 1 percent after China's central bank said on Tuesday it would guide rates to reasonable levels.
Gold remains on track for its biggest quarterly loss in more than 30 years after the Fed gave the clearest signal yet that it plans to taper its $85 billion monthly bond-buying programme.
Spot gold was up 0.3 percent at $1,284.66 an ounce at 0944 GMT, off an earlier low of $1,273.46, although it continued to underperform other precious metals, oil and copper.
"Bullion showed little reaction to firmer equities and other commodities, including platinum group metals and silver, after the People's Bank of China tried to once more calm the market on liquidity concerns," VTB Capital analyst Andrey Kryuchenkov said.
"We are sitting tight, consolidating ahead of U.S. data in very thin trading," he said. "People will give extra weight to any U.S. macro or QE3 related comments."
The Fed's quantitative easing measures, put in place to stimulate growth, have helped drive gold to record highs in recent years by keeping interest rates low while stoking inflation fears. Reducing those measures will likely hurt gold.
Investor appetite for bullion has faded, with the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, reporting another 4.2 tonne outflow on Monday.
BANKS CUT FORECASTS
A raft of banks, including Goldman Sachs, Morgan Stanley, Credit Suisse, Deutsche Bank and HSBC have cut their gold forecasts this week after its slide.
Credit Suisse cut its gold price forecast for 2013 to $1,400 an ounce from $1,580 an ounce, while HSBC cut its price view this year to $1,396 an ounce from $1,542 and Morgan Stanley reduced its 2013 forecast to $1,313 from $1,409.
"With investor demand for safe-haven assets waning against the backdrop of a strengthening U.S. dollar and rising U.S. bond yields, market conditions for gold and silver have become markedly less favourable," Morgan Stanley said in a report.
"Our price profile for these two metals now acknowledges that the annual average peak in the price for these two metals was achieved in 2012 with minimal prospect for recovery."
U.S. gold futures for August delivery were up $7.20 an ounce at $1,284.30.
Silver was up 0.5 percent at $19.75 an ounce. Spot platinum was up 1.5 percent at $1,348.49 an ounce, while spot palladium was up 1.8 percent at $671 an ounce.
South Africa's Association of Mineworkers and Construction Union (AMCU), which has emerged as the dominant union on the platinum belt after a vicious turf war with the rival National Union of Miners last year, wants gold producers to more than double the wages of entry-level miners, according to a document submitted to the companies. (Editing by James Jukwey)