Gold bar
Gold bar Reuters

Gold rebounded more than 1 percent Wednesday after posting its biggest drop in 18 months, as risk appetite retreated after Moody's downgraded Japan's debt rating and strong buying interest in Asia's physical market lent support.

The sharp drop in prices in the previous session triggered strong buying interest as Asia opened business, sending spot gold up 1.2 percent to $1,851.67 an ounce by 0303 GMT.

U.S. gold trimmed early losses to $1,854.80.

A huge drop in prices triggered some buying interest, said Ong Yi Ling, an analyst at Phillip Futures, adding that Moody's downgrading Japan may spur some safe-haven interest in gold as well.

Some gold bulls say it's time to take money off the table after bullion prices rallied about $400 from the beginning of July to a record high above $1,911 on Tuesday.

Ong said it would be premature to call Tuesday's price dip a correction since prices have rebounded strongly, but said a correction is long over-due and could be violent.

But there is quite a bit of downside risk if gold breaks below $1,800 on a sustained basis. It may go lower to $1,700 or so, said Ong.

Physical dealers were busy with a flood of orders from countries including China, Indonesia and Thailand.

Everyone is hunting for physical gold now, said a Singapore-based bullion dealer, adding that physical gold buying sustained even when prices hit record highs over the past few sessions.

India, the world's largest gold consumer, has yet to buy in bulk. Its festival and wedding season starts in late September and peaks during the Deepavali festival in late October.

Investors are on the watch for potential margin requirement hikes from the CME Group on U.S. gold, after the Shanghai Gold Exchange raised margins and daily trading limits on some of its gold forward contracts.

At a time of market turmoil, exchanges routinely increase the margin requirements to cover the risk of a default.

Other precious metals also bounced back from Tuesday's fall.

Spot silver gained 1 percent to $42.25, after sliding more than 4 percent in the previous session -- its worst in nearly three weeks.

Spot platinum traded up 1.1 percent to $1,877.24, after dropping more than 2 percent in the previous session.