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Gold rose on physical buying on Friday, failing to hold onto earlier sharp gains, as bullion posted heavy losses for a second consecutive week on investor liquidation driven by months of disappointment over its performance.
The precious metal is down more than 5 percent this week after notching its biggest-ever daily loss in dollar terms on Monday. Bullion's collapse caught many veteran investors, who see gold as portfolio protection against inflation and other market risks, by surprise.
"With the significant move to the downside, gold is rebounding off its low on a pick-up in physical demand and short-covering," said David Meger, director of metals trading at Vision Financial Markets.
The market was supported later this week as consumers snapped up bars, coins, nuggets and jewellery as a slump in the price of the yellow metal released years of pent-up retail demand.
Still, analysts said more weakness could be on the cards, including further outflows from exchange-traded funds and possible calls by Federal Reserve policymakers to reduce the need for further monetary stimulus.
Traders also closely monitor options-related strategies in the futures market ahead of U.S. gold option expiration next week.
Gold rose 0.6 percent to $1,398.96 an ounce by 2:52 p.m. EDT (1822 GMT), after trading as high as $1,424.51 in Friday's session.
U.S. gold futures for June delivery settled up $3.10 at $1,395.60, with preliminary Reuters data showed trading volume set to finish lower than its 30-day average.
Gold was underpinned after Fitch Ratings became the second major international agency to strip Britain of its top-notch credit rating.
Still, it posted a two-week loss of over 11 percent, its largest decline over a two-week period since October 2008. The market fell by a combined $225 on Friday and Monday, which compares with a total trading range of $260 in 2012. It is down about 18 percent so far this year.
The big question is whether gold has entered a lasting bear market after 12 years of consecutive yearly gains. Gold hit the lowest price since February 2011 and is now around $500 below its record high of $1,920.30 set in September 2011.
Dealers around the world said they saw heavy volumes of physical buying, even though prices had recovered nearly $100 since hitting a two-year trough this week. Buying improved in top consumer India after a lacklustre start.
However, holdings of the SPDR Gold Trust, the world's largest gold-backed ETF, are at their lowest in three years after falling by a further 0.2 percent to 1,133 tonnes on Thursday.
A plan by Cyprus to sell excess gold reserves to raise around 400 million euros sparked off gold's rout, as the news led to speculation that other indebted euro zone countries could follow suit.
Other precious metals were mixed as gold trimmed its gains, with silver down 0.3 percent to $23.16 an ounce and palladium 1 percent higher at $673. Platinum reversed earlier gains to trade down 0.1 percent at $1,421.49.