By Veronica Brown
LONDON (Reuters) - Gold rose 2.6 percent on Tuesday as the market tried to find its feet after the previous session's record-breaking daily loss, but even as physical buyers seized on the lower prices investors feared more falls.
Bullion posted its biggest ever daily drop in dollar terms on Monday, catching gold bulls, speculators and veteran investors by surprise.
Gold has now fallen about 20 percent so far this year after an unbroken 12 years of gains and is some 28 percent down from the record high hit in September 2011 at $1,920.30.
"I think everyone has to take a breath and it's likely that we'll see some rangebound trade. But there are people who still want to sell and they haven't done so yet," said David Govett, head of precious metals at Marex Spectron
Spot gold dropped to $1,321.35 an ounce - its lowest since January 2011. It later reversed the losses with physical buying seen as the main influence to rally some 2.6 percent to $1,387.01 by 1028 GMT.
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The asset traditionally viewed as a safe-haven has been undermined by a proposed sale of Cypriot gold holdings and uncertainty over the U.S. Federal Reserve's stimulus programme. It failed to capitalise on tensions in the Korean Peninsula even as Pyongyang made new threats of military action,
"We still believe that the price has further to fall - the fundamental (non-speculative) value of gold is still a fraction of the current price," Alan Miller, CIO of SCM Private, an investment management firm said in a note.
"One thing I have learnt about markets is that they rarely trade at fair value and they tend to over-shoot (in both directions), so I really do not think you can estimate the amount of money "safely parked" in gold which can quickly head for the exit when people realise they have bought into the latest bubble," he added.
U.S. gold futures for June delivery fell more than 2 percent to the weakest in more than two years before rebounding.
ROUT OF 1980 ECLIPSED
Monday's drop of around $125 per ounce in cash gold eclipsed the rout on January 22, 1980, a day after gold hit its then-record $850 on global panic over oil-led inflation due to Soviet intervention in Afghanistan and the Iranian revolution.
Reuters market analyst for commodities and energy technicals, Wang Tao, expects gold to fall further to $1,245 per ounce.
Gold hit an 11-month high in October last year after the U.S. Federal Reserve announced its third round of aggressive economic stimulus, raising fears the central bank's money-printing to buy assets would stoke inflation.
But the gain was erased by a rally in equities, talks the Fed could reduce its bullion-friendly bond buying programme, and concerns other indebted euro zone countries could follow Cyprus' plan to sell bullion reserves to raise cash.
Heavy outflows on global gold exchange-traded funds, which cut holdings to their lowest in more than a year, could also mark the end of a love affair between gold and investors.
Physical dealers saw inquiries from jewellers following the latest sell-off, but there were no signs of buying related to tensions between the two Koreas or bombings in Boston, which killed three people.
It was the worst bombing on U.S. soil since security was tightened after the attacks of September 11, 2001. President Barack Obama promised to hunt down whoever was responsible.
Premiums for gold bars edged up to $1.70 to the spot London prices in Singapore on Tuesday from $1.20 on the previous day, but dealers had yet to see a surge in demand from jewellers and speculators.
Platinum and palladium, which have also been hammered by heavy selling, regained strength after Japanese shares pared losses due to renewed weakness in the yen. Silver also managed to rally around 4 percent after dropping 12 percent on Monday.
(Additional reporting by Lewa Pardomuan and Manolo Serapio Jr; in Singapore, Clara Denina in London; Editing by Anthony Barker)