Gold edged up in Europe on Tuesday as lower prices drew investors back to the market and expectations that gold's appeal as a refuge from risk will persist acted as a pillar of support for the metal.
Spot gold was bid at $1,232.65 an ounce at 1130 GMT, against $1,231.65 late in New York on Monday. U.S. gold futures for August delivery eased $7.30 an ounce to $1,233.50.
This is a rebound after the sell-off last night, said VTB Capital analyst Andrey Kryuchenkov. We should consolidate here. The uptrend is still intact.
He said in the medium term, gold was supported by safe-haven related buying and uncertainty escalated by the euro zone debt crisis, as well as a slowdown in the U.S. economic recovery.
Improving sentiment and a lower dollar would also support gold in the short term, though to a lesser extent, he added.
European shares fell, led by a decline in the banking sector after Fitch's downgrade of BNP Paribas (BNPP.PA) revived concern about the health of the financial sector, while receding risk appetite hit shares in major mining companies.
China's decision to allow the yuan to rise against the dollar prompted a rally in risk-related assets, including industrial commodities, on Monday.
But this rally ran out of steam on Tuesday, oil prices slipping 0.8 percent and industrial metals like copper, aluminum and nickel all declining.
The euro retreated from a one-month high against the dollar on Tuesday, tracking a pullback in the yuan a day after China's pledge to allow its currency to trade more freely.
For the dollar, the central issue still feels like the performance of the equity market and while we have seen a good bounce in stock market sentiment, there is still... nervousness over its durability, said Credit Agricole in a note.
The pull-back overnight has already seen the dollar index bounce sharply off its low. Existing home sales today should paint a happy picture... and this could be enough to propel risk appetite higher, it added.
In addition to those numbers at 1400 GMT, the markets are also awaiting the release of the Richmond Fed manufacturing and services indexes, and the testimony of U.S. Treasury Secretary Tim Geithner on the government's TARP bailout package.
Longer term, gold is likely to be supported by lingering fears over sovereign risk, particularly in the euro zone.
According to UBS, a majority of delegates at the bank's recent Reserve Management Seminar for Sovereign Institutions said they believe sovereign risk default is the chief risk to the global economy over the next 12 months.
We contend that so long as fears about global debt sustainability and sovereign risk remain heightened, gold will continue to rise, said UBS analyst Edel Tully in a note.
Among other precious metals, silver was bid at $18.62 an ounce against $18.70.
The gold:silver ratio, which shows the number of ounces of silver needed to buy an ounce of gold, edged up to 66 after hitting its lowest since late May in the previous session.
Elsewhere platinum was at $1,576 an ounce against $1,587, while palladium was at $478 against $490. The autocatalyst metals are being supported by expectations for a recovery in demand from carmakers.
Volkswagen's (VOWG_p.DE) Audi unit (NSUG.DE) signaled it was set to sell more than 1 million cars this year as the premium automaker rides a wave of growth in China.
(Editing by James Jukwey)