(Reuters) - Gold prices gained half a percent on Friday, following a rebound in other commodities, but uncertainty about the euro zone's resolution of its debt crisis is likely to cap gains.
Gold dropped more than one percent in the previous session as deep divisions among European leaders on strengthening the bloc's rescue fund dampened hopes Europe was close to finding a solution, rattling commodities.
Conflicting voices from the euro zone over the past few days have directed the ups and downs of the financial market, and investors are eyeing the European Union summit this Sunday for further trading cues.
"The market will remain extremely vigilant to any signs from Europe," said Li Ning, an analyst at Shanghai CIFCO Futures. "The year-end peak consumption and gold's safe haven property, which has been overshadowed by its commodity property lately, underpin the sentiment in gold."
Spot gold gained half a percent to stand at $1,626.29 an ounce by 0628 GMT, but was headed for a weekly drop of 3.2 percent, its biggest such decline in nearly a month.
U.S. gold rose as much as 1.1 percent to $1,630.9, before easing to $1,627.90, on course for a weekly fall of 3.3 percent.
Technical analysis suggested spot gold could rebound to $1,650 during the day, said Reuters market analyst Wang Tao.
The previous session's sharp losses provoked buying interest in Shanghai. The most-active Shanghai gold futures traded at a premium of more than $10 over spot prices earlier in the day. The contract stood at 335.22 yuan a gram, or $1,634 an ounce, at a premium of $3.
Base metals rebounded strongly, helping lift the mood in the precious metals market. Copper rose more than 3 percent on the London Metal Exchange after diving nearly 7 percent on Thursday.
PHYSICAL DEMAND STEADY, BUYERS EYE FURTHER PRICE FALL
Gold's price dip to near $1,600 in the previous session triggered some physical buying, dealers said.
"There was a fair bit of buying but nothing frantic," said a Singapore-based dealer. "Perhaps the market is expecting a lower price."
Physical demand in Asia, mainly India and China, has entered the year's traditional peak season, but this demand alone is unlikely to lift prices above the current range.
"The main drivers behind prices still remain in the ETF holdings, hedge funds and the COMEX market," said the dealer.
Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, have remained constant at 1,227.511 tonnes for the past five sessions, down a modest 4.4 tonnes from the end of September.
And holdings of the world's largest silver-backed exchange-traded fund, iShares Silver Trust, edged lower from the previous session to 9,874.05 tonnes, lowest in nearly a month, as silver prices retreated 23 percent from a month earlier.
U.S. silver futures rose more than 2 percent to $30.995 an ounce, boosted by gains in gold and industrial metals, before easing to $30.76.
