Gold rose above $1,400 an ounce in Europe on Wednesday as simmering tensions in Libya lifted interest in the metal as a haven from risk, but gains were limited by concerns its sharp run higher may have been overdone.
Spot gold was bid at $1,404.29 an ounce at 1221 GMT (7:21 a.m. EST), against $1,399.20 late in New York on Tuesday. U.S. gold futures for April delivery rose $3.70 an ounce to $1,404.80.
The metal hit its highest since January 4 above $1,410 an ounce on Tuesday as worries over violence in the Middle East region stoked risk aversion, but later retreated as investors cashed in gains in gold to cover losses on other markets.
While gold remains constrained by fears that last week's 2.4% rise has pushed prices into unsustainable territory, rumbling tensions in Libya are still providing support.
"Gold certainly has seen a swift spike over the last two weeks on the back of Middle East tensions, especially after riots broke out in Libya," said Pradeep Unni, senior analyst at Richcomm Global Services in Dubai.
"What is, however, surprising is the steady decline in investment demand despite this uncertainty," he added. "This hints that the gains over the last few weeks may succumb to profit taking once the issues subside."
Violence flared in Libya last week as demonstrators took to the streets to demand an end to the 41-year rule of leader Muammar Gaddafi, after protests earlier this year toppled leaders in Tunisia and Egypt.
Gaddafi's increasingly desperate attempts to crush a revolt against his four-decade rule have killed as many as 1,000 people and split Libya, Italy's Foreign Minister said.
RISK AVERSION SPREADS
The wider markets showed widespread risk aversion. Stock markets retreated in Europe after a soft session in Asia, while industrial metals prices eased, though concerns over output from oil-rich Libya boosted crude prices.
Meanwhile, nominal safe havens like U.S. Treasuries, German government bonds and the Swiss franc rose, with the Swissie at a three-week high versus the dollar.
The dollar index .DXY meanwhile fell 0.4%.
But while dealers reported strong demand for investment products like gold bars, interest in bullion-backed exchange traded funds softened.
The world's largest gold-backed ETF, the SPDR Gold Trust, said holdings dropped to 1,218.243 tones on Tuesday from 1,223.098 tones a day before.
Holdings in the world's largest silver ETF, the iShares Silver Trust, fell to 10,342.89 tones on Tuesday from 10,519.05 tones the previous day.
Silver was at $33.27 an ounce from $33.04. The metal has risen strongly this month on worries about tightness in the market, but a spokesman for metals consultancy GFMS said on Wednesday there was no need for concern over supply.
"We are expecting a reasonably robust increase (in new mine output) this year," Paul Walker, GFMS's chief executive officer, told Reuters in an interview. "The rise in mine output should keep silver still in a surplus.
Platinum was at $1,795.99 an ounce against $1,788.50, while palladium was at $813 against $802.23.