Gold recovers and gains 1 percent on investor buying

By Atul Prakash

LONDON (Reuters) - Gold rebounded to gain more than 1 percent on Wednesday after hitting two-month lows in the previous session as firmer oil and a slightly weaker dollar against the euro prompted investors to snap up the metal.

But analysts said the broad commodities sell-off in recent days had damaged near-term sentiment and bullion investors would be cautious in chasing the metal higher ahead of U.S. payrolls data on Friday that could influence the dollar.

"We are trying to recover some ground and may succeed depending on the data releases in the U.S., but that could be temporary respite," said Tom Kendall, metals strategist at Mitsubishi Corporation.

"It's too early to be wholly convinced that the time is right to go long again for strategic investors. The market needs to steady for a while and it's possible that we will set up a range here between $875 to $900 for a week or two."

Gold hit a high of $894 and was at $891.50/892.40 an ounce at 6:21 a.m. EDT, up from $884.20/885.40 late in New York on Tuesday, when it fell as low as $872.90.

A decline of 3 percent on Tuesday took overall losses to 15 percent since gold hit a record high of $1,030.80 last month, making bullion attractive for physical dealers.

The dollar marginally fell against the euro, but held most of the gains made on Tuesday as traders saw news that some struggling financial firms had shored up their balance sheets as a sign the worst of the global credit crisis may be over.

The U.S. currency followed a climb in share prices around the world after Lehman Brothers Holdings (LEH.N: Quote, Profile, Research) raised $4 billion of capital on Tuesday, quelling some speculation that the investment bank may be in trouble.