Gold snaps two-day decline as European stocks slide

By Jan Harvey

LONDON (Reuters) - Gold rebounded more than 1 percent on Tuesday, snapping two days of losses as risk appetite evaporated, pushing European stocks down 1.7 percent and knocking the dollar to a 17-month low against the yen.

That helped to reverse a two-day drop in gold that had sent prices back towards their lowest since late February. Uncertainty over the outlook for U.S. monetary policy limited moves, however.

Spot gold was up 1.4 percent at $1,231.61 an ounce by 1335 GMT, while U.S. gold futures for June delivery were up $14.60 at $1,233.90.

German shares led losses in equities after data showing the biggest fall in German factory orders for six months suggested that Europe's biggest economy is becoming caught up in a global slowdown. Crude oil prices fell and the euro retreated a quarter of a percentage point against the dollar.

"Today we have weaker stocks, weaker European growth and a German 10-year yield trading below 10 basis points. Greek IMF negotiations and renewed weakness in oil are all adding to the support for gold," Ole Hansen, head of commodities research at Saxo Bank, said.

"After having been rejected on numerous occasions in the low 1200s, gold is having a look to the upside."

Gold had posted its biggest quarterly rise in nearly 30 years in the quarter to March, rallying 16 percent on fading expectations of moves by the U.S. Federal Reserve to normalise interest rates because of concerns over the global economy.

The metal, which is highly exposed to rising rates because they lift the opportunity cost of holding non-yielding assets, has been pinned in a range by uncertainty over Fed policy.

Fed Chair Janet Yellen said last week that the U.S. central bank would proceed cautiously with rate increases.

But Boston Fed President Eric Rosengren on Monday expressed surprise that futures markets currently imply only one or no interest rate increases this year, saying that such a prediction could prove overly pessimistic.

"While the recent turmoil in financial markets has made the Fed reluctant to hike rates further in the near term, the tight labour market and resilient core inflation are likely to cause the Fed to deliver a 25 basis point hike before year-end," Societe Generale said in a note.

Among other precious metals, silver was up 1.8 percent at $15.13 an ounce, platinum was up 1.7 percent at $955.30 and palladium was up 0.5 percent at $550.96.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by David Goodman and David Evans)