Gold prices rebounded more than 1 per cent on Thursday following a drop of 3 per cent in the previous session, as sharply lower prices attracted bargain hunters, but improved risk appetite is likely to cap gains.

Spot gold rose as much as 1.5 per cent to $1,842.89 an ounce after its most volatile day in two weeks, with a trading band of more than $80. It had pared some gains to $1,830.72 by 0410 GMT.

The most-active US gold futures contract rose 1.6 per cent to $1,846.6, before easing to $1,833.80.

'Some investors, speculators and physical buyers have shown a lot of buying interest at current prices, as they are much lower compared to a few days ago,' said a dealer at a Tokyo-based bullion house.

Spot gold hit a record high of $1,920.3 on Tuesday.

Technical analysis suggested that spot gold could fall towards $1,793.19 later in the day, said Reuters market analyst Wang Tao.

The faith in gold's long-term bullish trend remained intact as concerns about global growth still run high, although the short term is likely to remain choppy.

'Concerns about economic growth in the United States and euro zone will keep supporting gold prices. Even though we may see liquidation repeatedly along the way, gold will rise towards $2,000,' the dealer said.

Risk appetite returns

Investors abandoned precious metals for the riskier stock market, as Germany's top court rejected lawsuits aimed at blocking German participation in emergency loan packages, but gave its parliament more say in bailouts.

Further encouraging the risk appetite, Germany's industrial output jumped unexpectedly in July, offering hopes that Europe's largest economy may avoid recession.

'The gold market is anticipated to maintain its downward trend in the near-term, with a fall toward $1,750 possible over the next few days,' Tom Pawlicki, an analyst at MF Global, said in a research note.

The direction of the market is less than certain, as an uncertain economic outlook in the United States and Europe, mixed data, potential new stimulus moves unveiled by US President Barack Obama and deteriorating technical indicators vie for investors' attention.

As a sign of caution among investors, holdings of SPDR Gold Trust and iShares Silver Trust have remained unchanged for a few days. – Reuters