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Gold rose Thursday after two days of sharp declines, as tumbling European and U.S. equity markets on talk that Germany might enact a short-selling ban prompted investors to buy bullion as a safe haven.

Early in the session, bullion dropped as much as 3 per cent or more than $200 (U.S.) from Tuesday's record highs, as funds liquidated positions due to CME Group's second margin hike this month and technical weakness.

Many market watchers remained long-term bulls on gold although they said the precious metal could correct further after rising as much as $400 since July on speculation the Fed this week would announce new plans to stimulate a sluggish U.S. economy.

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"With that big sell-off in Germany, it spooked people about the financial problems lurking in Europe and the European banks. You will probably see gold pull back a little more, but the (upward) trend would still be intact," said Evan Smith, co-manager of Global Resources Fund at U.S. Global Investors, which manages $2.5-billion in assets.

Spot gold was up 0.5 per cent at $1,759.99 an ounce by 2:32 p.m. (ET) in choppy trade, about $60 above a session low of $1,702.44, its lowest in nearly two weeks.

U.S. December gold futures settled up $5.90 an ounce at $1,763.20. Trading volume was extremely heavy for a third straight day, on pace to be one of the highest this year.

Spot silver rose 2.9 per cent to $40.78 an ounce, now nearly $2 off its session lows.

Germany's DAX dropped as much as 4 per cent on rumors Germany could enact a short-selling ban following the example of other European nations. A German Finance Ministry spokesman told Reuters they were not planning a general short-selling ban.

Gold fell more than 1 per cent early, after the CME Group raised margins on gold futures by about 27 per cent, the biggest hike in more than 2-1/2 years and the second increase in a month.

Investors have cashed in on gold's latest rally after the yellow metal surged nearly 20 per cent in early August to Tuesday's record high at $1,911.46 an ounce. On Wednesday, U.S. gold futures also posted their sharpest price decline since 1980.

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"Gold's decline with such a dramatic magnitude in such a short period of time is driven by short-term momentum investors coming out, not long-term investors," said Stanley Crouch, chief investment officer at Aegis Capital, who oversees $2-billion in assets.

Holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust , declined by more than 27 tonnes on Wednesday, their biggest one-day outflow since Jan. 25. They have dropped nearly 60 tonnes this week.


Investors had their eyes on Jackson Hole. Wyoming, where Bernanke was due to give a speech on Friday. Some have speculated the Fed chief will hint at a third round of government debt purchases, or quantitative easing, to bolster a sluggish economy.

"I wouldn't advise investors to change a thing. We still largely have our gold exposure intact," said U.S. Global's Smith.

"I don't know if we are going to see anything incrementally new and significant enough to...fix the problems that are plaguing the economy," referring to Bernanke's speech, Smith said.

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Among platinum group metals, spot platinum was up 0.6 per cent at $1,813.24 an ounce, and spot palladium rose 0.5 per cent to $747.83 an ounce.

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