LONDON: Gold steadied above $1,720 an ounce on Monday, recovering from its biggest one-day drop in more than three months as the dollar softened and stock markets recovered. An early drop to a one-month low tempted price-sensitive buyers back to the market.

The metal fell 1.8 per cent on Friday as disappointing corporate earnings knocked stocks and other commodities lower and sent investors scurrying for the safety of the dollar. A reversal of those trends is now helping gold.

Spot gold was up 0.3 percent at $1,724.45 an ounce at 0945 GMT, having earlier touched its lowest since September 7 at $1,713.39, while US gold futures for December delivery were up $1.60 an ounce at $1,725.60.

“The market is licking its wounds after the dramatic sell-off late Friday,” Saxo Bank vice president Ole Hansen said.

“It goes to show that the market is in a bit of a correction mode at the moment, looking over the shoulder for the next potential buyer,” he said. “It was overdue after the continuous build in speculative interest in the last couple of months and some of the was given back last week.”

“The big question is how low can it go,” he added.

“I think it may have another leg down, I don't think it's out of the woods yet. It's lacking drivers, the calendar (for data) looks thin and it's difficult to see where a driver would come from.” In the short term, gold took some support from moves in the wider financial markets.

The euro firmed against the dollar on Monday after a victory in regional elections for Spain's prime minister boosted his austerity drive. The election had been seen by some as a referendum on the government's handling of the euro zone crisis.

Weakness in the US currency tends to lift gold, as it makes dollar-priced assets cheaper for other currency holders and lifts interest in bullion as an alternative store of value.  European stocks firmed as renewed expectations that Spain was moving closer to seeking a bailout eclipsed worries over corporate results, while oil prices were also lifted by intensifying violence in the Middle East.

FED AHEAD

Hedge funds and other big speculators have bailed out of gold, data from the Commodity Futures Exchange Commission showed on Friday, after its repeated failure to breach the $1,800 an ounce mark.  Gold futures on New York's COMEX saw an 8 per cent drop in net longs. The managed money in US gold fell by $2.4 billion, accounting for more than 85 per cent of the week's decline.

“We view this clean-out as positive for gold,” UBS said in a note on Monday. “By removing some of the excess froth, the metal is in a better position to start climbing once again.”

“However with net longs now sitting at 28.1 million (positions) and 85 per cent of the all-time high (total of net longs), a further reduction is necessary, although the actions of specs since last Tuesday's data will likely show further declines in length,” it added.

Attention is now turning to this week's policy meeting of the Federal Reserve for its impact on the currency markets and the wider financial sector.

While the Fed is likely to hold off from fresh action after announcing at its last meeting that it would buy $40 billion of mortgage-backed bonds a month until the US job market improved - a move which sent gold prices sharply higher - its remarks will still be closely scrutinised.

On the physical markets, light buying was seen from Asian jewellery makers. Top consumer India may increase purchases during the upcoming festive season, seen as an auspicious time to buy gold, though demand this year has been weak.

“Though India, the world's largest importer of gold, is known for its high demand in the current season, this year's purchase levels are below the usually known volumes despite the looming wedding period and other important festivals,” precious metals house Heraeus said in a note.

Among other precious metals, silver was up 0.4 per cent at $32.19 an ounce, while spot platinum was up 0.3 per cent at $1,612.20 an ounce and spot palladium was up 1.2 per cent at $625.72 an ounce.