Gold recovered on Thursday from the previous session's sell-off as lower prices attracted buyers, with concern over the ability of euro zone authorities to resolve the bloc's debt crisis still underpinning the metal's appeal as a store of value.
But investors remained wary that fresh financial market ructions linked to the euro zone debt crisis could spark more losses in the precious metal, which this week has fallen as much as 20 percent from September's record highs.
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Spot gold was up 0.5 percent at $1,616.60 an ounce at 0938 GMT, having hit a low of $1,597.84 late on Wednesday as stocks, the euro and other assets seen as higher risk tumbled, sparking gold selling to cover losses on other markets.
"There was a range of reasons for the sell-off, but there is also potential for us to come back again," said Danske Bank analyst Christin Tuxen.
"Gold is the one currency without debt liabilities, so if you are worried about the debt situation in the U.S. and euro zone, an obvious currency to look towards is gold. There are still reasons for it to be regarded as a safe haven."
Stocks markets clawed back some losses in early trade, though confidence remained fragile as investors waited to see whether German Chancellor Angela Merkel would face dissent in her own party in a vote over the euro zone rescue fund.
This could potentially make further decisions on resolving the euro zone debt crisis difficult. The euro rose 0.7 percent against the dollar and German bund futures edged lower on Thursday on hopes the vote would be positive.
"A stronger euro on a 'good vote' will probably help gold, given the way the metal has been reacting to EUR/USD of late," said UBS in a note.
"While any sign of rising dissent within Merkel's party should be a bigger positive for gold - and would indeed have been a few weeks ago - we don't think it would play out that way now as gold has shown greater vulnerability to dollar strength of late."
U.S. gold futures
Asset returns in 2011: http://r.reuters.com/suz52s
Gold correlation with dollar: http://r.reuters.com/ryx52s
Inflation adjusted gold price: http://r.reuters.com/pun62s
Gold in different currencies: http://r.reuters.com/wun62s
Gold/silver ratio: http://r.reuters.com/xyx52s
Gold/platinum ratio: http://link.reuters.com/xez92s
Despite its recent losses, gold remains one of this year's best-performing assets, up 15 percent against 6 percent drop in European shares , a 26 percent fall in copper prices and a 2 percent rise in the euro's value versus the dollar.
Physical gold demand, especially in Asia, has been extremely strong as prices retreated from record highs. Premiums for gold bars were at their strongest since at least February in Singapore and Hong Kong and their highest in a year in India.
Meanwhile, holdings of gold-backed exchange-traded funds have remained relatively robust.
"Volumes have been heavy as investors, on the Exchanges at least, have been forced to dump gold for cash," said RBS in a weekly note on Thursday. "There has been very little movement in the ETFs, however, signalling that the core holders are not going to desert gold as an important risk hedge."
Among other precious metals, silver was up 1.7 percent at $30.38 an ounce. Silver prices have suffered hefty losses this month, plunging by more than a quarter as the support offered by higher gold prices evaporated.
Spot platinum was up 0.4 percent at $1,528 an ounce, while palladium was up 0.4 percent at $618 an ounce.
Platinum retained its unprecedented discount to gold prices as buyers worried a more anaemic economic environment would weigh on demand for industrial precious metals.
"Platinum margins are being squeezed by rising labour costs, and prices are falling due to weakness across the commodities complex," said Standard Chartered in a report.
"While we expect prices to trend higher in the year ahead, downside risks are elevated. High-cost producers might therefore want to sell into rallies as insurance against further margin erosion." (Reporting by Jan Harvey; Editing by Alison Birrane)