Gold recovers as price drop fuels fresh demand

Chart support around $1,180 an ounce has also helped limit losses in gold, analysts said.

Spot gold was bid at $1,193.35 an ounce at 1352 GMT, against $1,191.50 late in New York on Tuesday. U.S. gold futures for August delivery were down $1.50 to $1,193.50.

The general feeling is still of insecurity, and given the drop, people might see (gold) as a bargain, probably more on the speculative side than on the long-term investment side, said Wolfgang Wrzesniok-Rossbach, head of sales at Heraeus.

Gold has fallen some 6 percent from the record high at $1,264.90 an ounce it hit in late June, which has tempted some buyers back to the market.

In India, the world's biggest gold consumer, jewelers bought stocks ahead of religious festivals, and other physical buyers in Asia snapped up bullion after prices fell.

On the wider financial markets, the dollar firmed versus the euro, as the single currency slipped on concerns about the global economic recovery and as investors scrutinized details of plans to test the financial health of European banks.

Although 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.

Elsewhere European shares turned positive as banks pared losses on optimism that results from impending stress tests may not be as bad as feared.

CHINA MULLED

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

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.

The market also found good technical support above 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 (euros)/$1,231 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.

Silver was at $17.77 an ounce versus $17.78, while platinum was at $1,507 an ounce against $1,512.50 and palladium rose to $438.50 versus $435.

(Additional reporting by Pratima Desai; editing by Anthony Barker)