Gold ends higher, bounces off 2-week low

By Frank Tang and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold finished higher on Tuesday, rebounding from a two-week low early in the day on chart-based support and as investors covered short positions.

"Gold traders followed a reversal of a technical trend. They had second thoughts late in the day and covered shorts. I don't think there is any fundamental news that motivated the rally that we saw late in the day," said FC Stone precious metals broker George Nickas.

Spot gold was at $863.55 an ounce at 1:57 p.m. EST, up 0.5 percent from the last trade of $858.90 on Monday.

U.S. gold futures for February delivery settled up $8.20 to $866.00 an ounce on the COMEX division of the New York Mercantile Exchange.

Bullion dropped to a two-week low of $838.55 in early trade as the dollar extended its rally against the euro.

VM Group analyst Matthew Turner said gold investors were looking to currency markets for direction.

"A lot of news on physical demand has been quite poor, and that might also be weighing on prices," he added.

Then gold rose, even as the dollar climbed further against the euro after a flash estimate of euro zone inflation came in weaker than expected, boosting pressure on the European Central Bank to cut interest rates at its January 15 meeting.

A firm dollar reduces gold's appeal. But the U.S. currency trimmed gains after data showed U.S. factory orders and pending home sales dropped more than expected in November.

DEMAND FIRM FROM FUNDS

While the stronger dollar and reports of lackluster jewelry sales weighed on prices, demand from exchange-traded funds -- which issue securities backed by physical gold -- remained firm.

ETF Securities, which operates Europe's largest gold-backed ETF, said holdings of its Physical Gold exchange-traded commodity (PHAU.L) rose 2 percent in the week to January 2 to 1.899 million ounces.

Holdings of the world's largest bullion ETF, the SPDR Gold Trust, held at a record 780.23 tonnes on Monday.

"Gold is holding (where it is) because of investment demand for gold ETFs, rather than demand from the physical side or as a hedge against the U.S. dollar," said Commerzbank analyst Eugen Weinberg.

Firmer oil prices, hovering just below $50 a barrel amid supply fears fueled by Israel's incursion into Gaza and a dispute between Russia and Ukraine over natural gas, also lent some support to gold.