Gold bounced on Thursday on bargain hunting after a drop the previous day, but a firmer dollar was likely to cap gains, while falling stock markets could still prompt investors to sell bullion to cover losses.
Weaker equities and worries about the health of the global economy sparked selling in platinum to its lowest since July 22 , with sister metal palladium tumbling around 4 percent in thin trade.
Gold added $2.12 an ounce to $1,199.12 an ounce by 0306 GMT, still hovering below the closely-watched 50-day moving average. It briefly crossed $1,200 on Thursday but bullion was well below a lifetime high around $1,264 struck in June.
"I would expect the equity markets continue to sell off. We may see more gold selling as we've often seen before to cover those margin calls," said Darren Heathcote, head of trading at Investec Australia in Sydney.
"But then one might question whether or not, given the uncertainty, we might get more safe haven buying. It's being pulled both ways, in terms of selling for margin calls, but on the other hand safe-haven investors will be attracted to gold."
U.S. gold futures for December delivery rose $3.0 to $1,202.2 an ounce.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings rose to 1,285.787 tonnes by August 11 from 1,282.746 tonnes on August 5. The holdings hit a record at 1,320.436 tonnes on June 29.
The Nikkei average fell 2 percent after three major Wall Street indexes on Wednesday posted their worst percentage drops since July 16 as fears of sustained global economic stagnation caused investors to flee to safe assets.
Platinum and palladium track equities because of their industrial use, mostly in autocatalysts, and dealers said Thursday's drop in prices was a knee-jerk reaction to declines in Asian stocks.
"I think we are just reacting to the drop in stock markets, but there has been some physical buying from jewellers because of cheaper prices," said a dealer in Hong Kong who trades platinum.
Commodities consultant CPM Group said recently the platinum market will see a narrower surplus in 2010 on the back of strong investment interest during the launch of U.S. platinum-backed exchange traded funds and a recovering auto industry.
The dollar continued to firm after scoring its biggest daily gain for nearly two years the previous day as concerns about the U.S. and global economies triggered a wave of unwinding in short dollar positions.
