Gold edges off 2-1/2 mth low on uncertainty over Ukraine ceasefire

By Jan Harvey

LONDON (Reuters) - Gold recovered from 2-1/2 month lows on Wednesday as a reports of a potential ceasefire in eastern Ukraine sowed confusion on the eve of a NATO summit, though strength in stocks kept the metal under pressure.

Prices hit their lowest since mid-June after Ukraine said it had reached agreement with Russian President Vladimir Putin on a "permanent ceasefire" in its eastern Donbass region.

However it later pared losses after the Kremlin denied any actual truce deal, leading Ukraine to clarify that its president had agreed with Putin on steps towards a "ceasefire regime" in Kiev's conflict with pro-Russian rebels.

Spot gold hit a low of $1,261.19 an ounce after the initial report from Ukraine, but had edged back to $1,269.26 an ounce by 1127 GMT, up 0.3 percent. U.S. gold futures for April delivery were up $5.20 an ounce at $1,270.20.

Spot prices fell 1.7 percent on Tuesday, their biggest one-day drop since mid-July.

With stock markets rising, the dollar on a generally firmer footing and physical demand soft, the unrest in Ukraine and the Middle East had been a key factor keeping gold prices underpinned over recent months.

"Given there was little physical demand and shrinking investor consumption in August, geopolitical headlines were supportive with little other reason to keep bullion underpinned and maintain that 1,275/80 support last month," VTB Capital analyst Andrey Kryuchenkov said.

"There is little support until $1,250," he added. "The market is bearish and we shall see a lot of technical selling now that we have closed below $1,275."

European shares were up 0.8 percent on Wednesday, having rallied to session highs after the Ukraine statement. Strength in equities this year has detracted some attention from gold, adding to price pressure on the metal. [.EU]

Traders are now looking for direction to a European Central Bank policy meeting on Thursday and U.S. non-farm payrolls data on Friday.

The payrolls data is seen as a key barometer of the health of the U.S. economy. A weak reading may undermine expectations that the Federal Reserve will keep scaling back its gold-friendly monetary stimulus programme, potentially supporting the metal.

ECB, U.S. DATA AWAITED

Physical demand in Asia was muted on Wednesday despite the previous session's price drop, traders said, which would usually be expected to tempt price-sensitive buyers.

"Light physical buying was evident around $1,265 but the potential for a further sell-off later in the week may keep buyers on the sidelines for now," MKS said in a note.

Investment interest in gold has been soft of late. SPDR Gold Trust, the world's largest gold-backed exchange-traded fund and a measure of investor sentiment, said its holdings fell 1.8 tonnes to 793.20 tonnes on Tuesday. [GOL/ETF]

Among other metals, palladium was down 0.2 percent at $876.25 an ounce. The stand-off between major producer Russia and Ukraine helped push prices to 13-1/2 year highs at $910 an ounce this week, as traders worried that supply could be affected by the conflict.

Russia was the source of more than 40 percent of global palladium supply last year.

Silver was up 0.5 percent at $19.19 an ounce, while spot platinum was up 0.2 percent at $1,405 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Michael Urquhart and Susan Thomas)