Gold crawls off 5-year low, but downside risk seen intact

Gold edged up from a five-year low on Thursday as the dollar weakened, but the modest gains suggest bearish investors are still hovering in the market after an early-week rout led to bullion's deepest loss in nearly two years.

Holdings in the world's biggest gold-backed exchange-traded fund, SPDR Gold Shares, shrank for a fifth day on Wednesday to the lowest level since 2008.

Spot gold rose 0.5 percent to USD 1,098 an ounce by 0241 GMT, after sliding more than 1 percent to USD 1,086.89 on Wednesday, its cheapest since March 2010.

Gold tumbled as much as 4 percent on Monday in a sell-off exacerbated by big trading volumes on the Shanghai Gold Exchange after investors dumped more than USD 500 million of bullion in New York in seconds during early Asian trading hours.

"It is going to be foolish to be a gold bull right now. The gold bugs would have to wait for their day, but equally I don't think it is going to be a complete collapse from here either," said Vishnu Varathan, senior economist at Mizuho Bank.

Gold has been dragged down by expectations the Federal Reserve will raise interest rates later this year as the US economy recovers. Data on Wednesday showed US home resales rose in June to their highest level in nearly 8-1/2 years.

But Varathan said while the Fed may be tightening policy, others such as the European Central Bank and the Bank of Japan are still engaged in quantitative easing, which could boost inflation and spur demand for gold as a hedge.

"Gold may be headed lower but I don't think it's set up for an outright collapse like what we saw in iron ore over the last two years," said Varathan.

Hit by a global glut as top market China's steel demand wanes, the price of steelmaking iron ore has fallen to a third of its 2013 peak.

US gold for August delivery was up 0.5 percent at USD 1,097.10 an ounce, after a 10-session decline.

Holdings of SPDR Gold Trust dropped to 22.098 million ounces on Wednesday, the lowest since August 2008.

"Bullion may be at risk of further declines should gold-ETFs continue to liquidate," HSBC analyst James Steel wrote.Spot palladium was the early outperformer among precious metals, climbing 1.6 percent to USD 633.98 an ounce, having fallen to its lowest since 2012 during Monday's selloff. Platinum rose 0.7 percent to USD 985.60 an ounce and silver gained 0.2 percent to USD 14.81.