Gold erased earlier losses on Thursday, as new signs of an escalation in tensions in Ukraine hit global stock markets, bolstering the metal's appeal as an insurance against risk. Prices rose as much as 1.1 percent to a session high of $1,297 an ounce after Russian Defence Minister Sergei Shoigu was quoted by the Interfax news agency as saying that Russia had started military drills near the Ukrainian border on Thursday.
He was quoted as saying that the move was in response to operations by Ukrainian forces against pro-Russian separatists and NATO exercises in eastern Europe. Spot gold had fallen to a 2-1/2 month low of $1,268.24 in earlier trade, due to firmer equities and a weaker technical picture that had triggered strong selling. The metal was up 0.5 percent at $1,289.90 an ounce by 1452 GMT.
US gold futures gained 0.5 percent to $1,289.60 an ounce. Upbeat US durable goods data for March had earlier given a boost to the dollar, triggering further losses in the gold price, but the currency retreated on the headlines from Russia. Tensions between Moscow and Western powers over Ukraine are lending gold support but it remains in a somewhat fragile situation as interest from long-term investors is still absent, Saxo Bank's head of commodity strategy Ole Hansen said.
Global stocks, which started the day on a strong footing due to upbeat earnings from the tech sector, also fell after the Russian news. Gold tends to hold an inverse relation with equity markets, as investors seek refuge from riskier assets in times of political or financial troubles.
In the longer term it is US economic health and the US Federal Reserve's decision on interest rates that will continue to be the main driver of gold prices, traders said. The next big event is the two-day Federal Open Market Committee meeting on interest rates on April 29-30. Investment demand remains weak with the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, seeing sharp outflows in recent days.
Last week, the fund's outflows totalled 9.3 tonnes, erasing all the gains made in the year. "It seems that $1,300 is not easy to break through for the time being. There's not much buying from China. People are just waiting for the price to fall," said a physical dealer in Hong Kong. "Premiums for gold are mostly unchanged at $1, although there are also people who offer it at 80 cents premiums, depending on the brand." Among other precious metals, silver was up 1.1 percent to $19.62 an ounce, having dropped to a near-five month low of $18.91 an ounce earlier. Spot platinum rose 0.4 percent to $1,402.25 an ounce and spot palladium gained 1.6 percent at $797.50 an ounce.
