Gold recovered in afternoon trade on Wednesday, but a firmer dollar and a report that China would not make gold a major part of its reserves undermined sentiment.

Physical interest in the metal at lower prices and strong chart support after its recent correction helped limit early losses, analysts said.

Spot gold was bid at $1,191.55 an ounce at 1302 GMT, against $1,191.50 late in New York on Tuesday. U.S. gold futures for August delivery were down $2.3 an ounce to $1,192.80.

The precious metal slipped to a session low of $1,185.05, its weakest since late May, in earlier trade after China's State Administration of Foreign Exchange said gold will not become a major component of the central bank's portfolio.

Official sector interest in gold, which has seen a number of particularly Asian central banks increase their reserves and European banks hold off selling the metal in the last year, has been a major support to its run higher in that period.

However, analysts said given the size of China's currency reserves, it was unsurprising gold would play only a relatively minor role in its portfolio, and that the news was unlikely to detract from central bank interest in gold if prices fell.

China has $2 trillion in currency reserves, so it is simply not possible for them to invest a major part of this in gold -- the gold isn't there, said Commerzbank analyst Daniel Briesemann.

I am convinced they will increase their gold holdings if prices fall further. I don't expect gold to fall below $1,000, but if that happened...China would step in and buy gold.

He said concerns over the economic outlook after a raft of soft U.S. economic data was likely to keep gold well bid. Over the mid to long term, gold should be very well supported, he said.

The usual inverse link between gold and the dollar weakened earlier this year as both benefited from risk aversion.

A stronger U.S. currency usually makes dollar-priced metals more expensive for holders of other currencies.


The market was likely to find good technical support around the $1,180 an ounce area, analysts said, with gold's longer-term uptrend likely to resume once the correction had run its course.

With daily momentum oscillators posting their first oversold readings since March, we look for renewed signs of basing ahead of resumption of the cyclical bull trend, which is still very much intact, Barclays Capital said in a note.

Bulls need to regain the 21-day averages at 997/1,231 (in euro and dollar terms, respectively) to regain control.

In New York, holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, dipped further on Tuesday to 1,316.481 tonnes.

The SPDR's holdings have fallen 3.955 tonnes from a record 1,320.436 tonnes at the end of June, against a rise of 18.429 tonnes in the same period of the previous month.

But Indian jewelers rushed to replenish gold stocks ahead of religious festivals, and other physical buyers in Asia snapped up bullion after prices fell.

Silver was at $17.72 an ounce versus $17.78, while platinum at $1,508 an ounce against $1,512.50, and palladium at $435.00 versus $435.

(Additional reporting by Pratima Desai; editing by Sue Thomas)