LONDON -- Gold bounced from fresh six-week lows on Tuesday as bargain hunters returned, but analysts expect volatility to continue until stock markets stabilise.
Spot gold hit $632.30 an ounce, the lowest since January 22 during Asian trade, but by 1523 GMT it was higher at $644.90/645.90 an ounce compared with $637.60/638.35 late in New York on Monday.
"In the near term, gold prices are likely to see continued volatility, albeit remaining relatively directionless as the market tries to gain its bearings," Morgan Stanley said in a research note.
The precious metal is down around 7 percent since hitting a 9-month high of $689 an ounce seen on February 26 when the market was targetting $700 an ounce.
Analysts said firmer equity prices in Asia and Europe have helped gold, which over the last week has followed global stock markets lower as risk-averse investors sold portfolio assets, including gold.
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Stocks revived and the dollar and euro rebounded against the yen, breaking a five-day flight from risk and fanning cautious hopes the sell-off may have run its course.
Others have sold gold to pay for losses on equity holdings, but that, too, seems to have receded, traders said.
"Generally people are drained but I think starting to feel optimistic for higher prices," a bullion trader said.
"We really need to see some good sideways trade to give the market a breather as price action has been fierce over the past two weeks."
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Traditionally gold is used as a haven from economic and financial uncertainty and a hedge against inflation.
But that hasn't been the case this time because many funds, which borrowed yen to invest in assets with higher yields — carry trade — are reversing their positions on the expectation that Japanese interest rates are likely to rise further.
Japan raised benchmark interest rates to a decade-high 0.50 percent last month.
"Japan has taken a step towards normalising interest rates, so the carry trades are being unwound," said BNP Paribas analyst David Thurtell, who added that the direction of gold prices and volatility over the next week could depend on economic data.
Specifically the February U.S. non-farm payrolls data — a key gauge of the economic health of the United States — due on Friday, could determine the direction of stock markets around the world, he said.
"The risk is the payrolls are weak, which means there is potential for a further shake-out in equities."
Over the longer term, however, analysts are still bullish about gold price prospects, but speculators are expected to remain cautious until they are sure equities have stabilised.
Silver rose to $12.80/12.85 an ounce from $12.64/12.69 late in New York. It had fallen to $12.38 an ounce on Monday, its lowest since mid-January.
Platinum rose to $1,186/1,191 an ounce from $1,168/1,173 an ounce in New York on Monday, when it fell to a one-month low of $1,159.
Palladium rose to $342/346 from $335/340 an ounce.
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