Singapore: Gold was trading near its highest in two weeks on Wednesday, bolstered by signs of increasing demand in China and as rising tensions over Ukraine burnished its safe-haven appeal.
But investors continued to pull money out of gold-backed exchange-traded funds, raising the risk that price gains could be short lived.
Spot gold had risen 0.2 percent to USD 1,311.10 an ounce by 0646 GMT, after gaining 0.9 percent in the previous session. The metal hit a two-week high of USD 1,314.43 on Tuesday.
"Gold is going to rebound some more in the short term," said Mark To, head of research at Hong Kong`s Wing Fung Financial Group.
"After the Crimea annexation, I think people are more and more concerned that the rest of the Ukraine territory will be in danger somehow," he said, adding that would drive risk aversion and push up gold prices.
U.S. Secretary of State John Kerry accused Russian agents and special forces of stirring separatist unrest in eastern Ukraine, saying Moscow could be trying to prepare for military action as it had in Crimea.
Moscow annexed the Black Sea peninsula last month after a referendum staged when Russian troops were already in control.
The rising tensions increased gold`s safe-haven appeal, while a lower greenback made the dollar-denominated metal more attractive for holders of other currencies.
Technicals are also looking positive, said some analysts.
"The underlying bearishness is weaker compared to a week ago as the (price) declines are short-lived and prices seem well supported above USD 1,306.50, a resistance turned support level," Phillip Futures said in a note.
SPDR HOLDINGS VS CHINA DEMAND
Holdings in SPDR Gold Trust, the world`s largest gold-backed ETF and a good measure of investor sentiment, fell 2.7 tonnes to 806.48 tonnes on Tuesday.
The fund has not seen any fresh inflows since March 24.
"As long as the outflows from ETFs continue, the price gains will not stick," said one trader.
Meanwhile, in the physical markets Chinese buying seemed to have picked up slightly.
Bullion prices on the Shanghai Gold Exchange climbed to a premium of about USD 1 an ounce to spot prices for the first time since early March.
They were at a discount of as much as USD 10 last month on weak demand.