Gold gains on China demand; ETF outflows persist

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Gold edged up on Wednesday, buoyed by strong demand from China after prices fell 1 percent in the prior session, but persistent outflows from exchange-traded funds are expected to cap gains.

While bullion's safe-haven appeal has lost some lustre as rallying stocks attract investors, lower prices of the precious metal are luring physical buyers across Asia, with dealers facing a tough time organising supplies to meet demand.

Spot gold rose 0.6 percent to $1,388.31 an ounce by 0311 GMT, after falling to $1,373.14 on Tuesday when equities were lifted by strong U.S. economic data.

US gold rose 0.6 percent to $1,387.40.

"We can see some Shanghai futures buying interest pushing the market higher," said Peter Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.

"But the upside should be limited. I think prices will see some resistance at $1,400 and downside support at $1,350."

Gold prices in Shanghai are about $25 more than spot gold, indicating that demand was strong in China, the world's No. 2 consumer after India.

Physical demand for the precious metal has picked up in Asia since gold's biggest daily plunge in 30 years in April. Premiums for gold bars hit a record high in Asia last week as a mad rush for bullion crimped supplies.

Bank of America Merrill Lynch has lowered its gold and silver price forecasts for 2013, citing weak fundamentals and lack of investment buying.

It now expects gold prices to average $1,478 an ounce in 2013, 12 percent below its prior forecast of $1,680.

Stronger equities have also dented gold's appeal. The Standard & Poor's 500 Index has gained a whopping 16 percent so far this year, while gold has dropped 17 percent - on track for its first annual drop after 12 straight yearly gains.

Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell to 1,012.25 tonnes on Tuesday, their lowest since February 2009.

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