Gold stays near seven-month high as stocks remain volatile

By Susan Fenton

LONDON (Reuters) - Gold steadied on Tuesday after surging to a 7-1/2 month high the previous day but was still underpinned by risk aversion as equities remained volatile and the dollar was weak.

Fears that the global economy could tip into recession and worries about some banks have battered share markets in recent days, helping gold gain 6.5 percent since the start of last week as investors sought a safe haven.

Analysts said the metal is looking overbought and it pulled back after stopping short of testing key psychological resistance at $1,200 an ounce on Tuesday, but many say it could push higher again in coming days.

"We need a stabilisation in stock markets and as long as that does not happen risk aversion will remain elevated and very supportive (for gold)," said Commerzbank analyst Carsten Fritsch.

Spot gold was trading down 0.1 percent at $1,189.96 an ounce by 1527 GMT, after rising to $1,200.60 on Monday, its strongest since June 22 last year.

It briefly rose to $1,198.90 after U.S. markets opened, a move traders attributed to buying by exchange-traded funds.

Investor sentiment globally remained fragile. U.S. equities were choppy and European shares fell to their lowest level in more than two years, after skidding more than 3 percent on Monday, while the dollar was weaker.

Strong demand for safe assets was underscored when the yield on Japan's benchmark 10-year government bond turned negative for the first time on Tuesday as the Nikkei stock index tumbled more than 5 percent, its biggest daily drop in nearly three years.

Gold, which is now up 12 percent this year, reversing last year's 10.4 percent loss, has benefited as some weak economic data recently prompted financial markets to scale back expectations for U.S. interest rate rises this year.

Markets will be watching for any clues on monetary policy when Federal Reserve Chair Janet Yellen appears before the House Financial Services Committee on Wednesday and Thursday.

U.S. gold for April delivery was down 0.5 percent at $1,191.7 an ounce.

Underlining gold's rising appeal, holdings in eight major gold exchange-traded funds (ETFs) rose to 43.3 million ounces on Friday, the highest since July 2015.

More significant was the rapid pace of inflows since the start of the year, having risen more than 8 percent and the biggest five-week surge since March 2011.

"For the time being we continue to see the safe-haven demand being supportive for gold. The next key level is $1,200 but it is looking in overbought territory," said Citigroup analyst David Wilson. "We suggest it consolidates (first) between $1,150 and where we are now."

China's markets are closed for the Lunar New Year holiday this week, dampening demand for gold.

Spot silver was up 0.2 percent at $15.34 an ounce, near Monday's three-month high of $15.46. Platinum was up 0.6 percent to $926.7 an ounce, also near a three-month peak of $931.76 reached overnight. Palladium slipped 0.4 percent to $511 an ounce.

(Additional reporting by Manolo Serapio Jr. in Manila; Editing by Mark Potter and David Evans)