2013.04.1607:47:25UTC+00Gold rebound from a two year low

The gold rose 1 percent on Tuesday after a drop to a 2-year low earlier in the session ignited physical buying, but investors frustrated by the metal's lackluster performance remained cautious amid fears of central bank sales and global growth. Bullion posted its biggest ever daily drop in dollar terms in the previous session, catching many gold bulls and veteran investors by surprise. Gold has now fallen about 20 percent so far this year after an unbroken 12 years of gains.

The typically safe-haven asset has failed to capitalize on tensions in the Korean Peninsula even as Pyongyang made new threats of military action, and has been hit by uncertainty over the U.S. Federal Reserve's stimulus program. "The scale of the down move is such that whenever we get any signs of stabilization or any official sign of interest to buy, it's going to cause something in the order of a 1.5 to 2 percent rebound. It's only to be expected," said Tim Riddell, head of ANZ Global Markets Research, Asia.

"Given the scale of the sell-off, I would say that the rebound is not that impressive. The fact the stock market is stable is helping, and it's not creating a further position liquidation mode." Cash gold dropped to as low as $1,321.35 an ounce, but reversed losses to trade at $1,359.51 by 12:47 a.m. ET, up $6.76, with dealers noting buying interest from consumers in Asia. The metal is about $560 below a lifetime high around $1,920 an ounce hit in September 2011.

Platinum and palladium, which have also been hammered by heavy selling, regained strength after Japanese shares pared losses due to renewed weakness in the yen. U.S. gold futures for June delivery fell more than 2 percent to the weakest in more than two years before rebounding slightly, while the most active bullion contract on the Tokyo Commodity Exchange sank as much as 10 percent. Gold hit an 11-month high in October last year after the U.S. Federal Reserve announced its third round of aggressive economic stimulus, raising fears the central bank's money-printing to buy assets would stoke inflation. "The fall in gold prices is reminiscent of some of the market capitulations seen during the global financial crisis when leveraged investors were required to sell assets to maintain balance sheets and preserve liquidity," said Ric Spooner chief market analyst at CMC Markets in Sydney.

"The extent of leverage is now much lower and this may see more orderly conditions return to the gold market sooner rather than later. Markets will also be sensitive to any further information on the situation in Boston and whether or not it has any geopolitical implications. "Premiums for gold bars edged up to $1.70 to the spot London prices in Singapore on Tuesday from $1.20 on the previous day, but dealers had yet to see a surge in demand from jewelers and speculators.

"I think with a further reduction in gold prices, premiums may go up further. The demand is there, but the Thais are still on holiday and physical offtake in Hong Kong is not fantastic," said a dealer in Singapore.