Cash gold shrugged off weakening U.S. bullion futures to jump as much as 1 percent on Wednesday as buyers snapped up gold bars, coins and nuggets after prices touched their lowest in more than two years the session before.
But bullion is not out of the woods yet as investors continued to shift holdings from exchange-traded funds, even as the upturn in physical buying led to a shortage of gold bars in Hong Kong and Singapore.
Gold hit a session high of $1,381.80 an ounce and was standing at $1,370.84 by 0611 GMT, up $3.05. The metal, which tumbled to $1,321.35 on Tuesday, has fallen about 18 percent so far this year after an unbroken 12-year string of gains.
"People are actually buying everything, gold bars, gold coins. People are rushing to get a hand on it. We have a problem meeting the demand because we are unable to get new supply," said Brian Lan, managing director of GoldSilver Central Pte Ltd in Singapore.
"There's a huge backlog. It's the same for silver. So far sentiment seems to be improving. Even the price has more or less stabilised."
The purchases pushed up premiums for gold bars in Singapore to their highest in 18 months at $1.70 an ounce to spot London prices, but demand from top consumer India was surprisingly low despite the wedding season.
"India is sleeping. I mean, they are buying some gold but in small quantities. We don't see a rush even though the price has come off," said a physical dealer in Singapore.
India celebrates Akshaya Tritiya, a key gold-buying festival, next month, while the wedding season will continue until early June. Indian parents typically give gold jewellery to their daughters when they marry.
U.S. gold futures, which sometimes dictate spot gold prices, slipped more than 1 percent after investors dumped holdings of gold-backed exchange-traded funds and as the contract caught up with a recent sell-off in the cash market.
SPDR Gold Trust, the world's largest gold-backed ETF, said its holdings fell 0.73 percent to 1,145.92 tonnes on Tuesday from 1,154.34 tonnes on Monday. Holdings of global gold ETFs are currently at their lowest since late 2011.
On Monday, spot gold recorded its biggest ever daily fall in dollar terms - catching gold bulls, speculators and veteran investors by surprise.
The asset, usually seen as a so-called safe haven, has failed to capitalise on tensions in the Korean peninsula and has been hit by uncertainty over the U.S. Federal Reserve's stimulus programme.
Worries are also festering that other indebted euro zone countries could follow Cyprus' plan to sell bullion reserves to raise cash.
"Over a 1-6 month time horizon, risks remain to the downside, given the negative trend and merely neutral fundamentals," said Credit Suisse in a report. "We are thus downgrading our 3-month outlook to negative, and expect prices of $1,300 in three months."
Tokyo gold futures regained strength as the yen weakened, the Nikkei rebounded and physical gold buying picked up. The most active contract, currently February 2014, sank to its lowest since August on Tuesday.
"These days, gold moving by $10 is not really a big thing. I would think panic selling was over by yesterday, but it's still not a normal market. People are still sensitive to movements in the market," said a dealer in Tokyo.
"In Tokyo, we are seeing good physical demand. People are buying physical gold, kilobars. Physical buyers are looking at this dip as a chance to buy," said the dealer, who pegged support at $1,350 an ounce for spot gold.