Gold bars and granules. File photo: Reuters

London - Gold reversed earlier losses on Tuesday, hitting a 2-1/2 week high above $1,610 on renewed flight-to-safety investment ahead of an imminent vote in the Cypriot parliament on a bailout plan.

Cyprus's parliament was set to reject an unpopular tax on bank deposits in Tuesday's vote, a government spokesman said, a move that would push the island closer to a default and banking collapse.

Spot gold rose to its highest since February 27 at $1,613.86 an ounce earlier and was last seen at $1,612.87, still up 0.5 percent by 17:58 SA time.

US gold futures for April delivery rose $4.40 an ounce to $1,609.

In euro terms, gold peaked to its highest since February 7 at 1,251.33.

The euro zone proposal, unveiled at the weekend, to partially fund a bailout of the island by taxing bank deposits rattled financial markets and pushed gold higher as risk averse investors chose it as a haven.

The metal had struggled to retain those gains and started the day on the back foot, falling to a session low of $1,599.54, as cautiousness prevailed on concerns over the plan.

“I think (holders of) short (positions) got nervous and started to cover their positions,” Deutsche Bank precious metals trader Michael Blumenroth said.from risk.

“Some flight to safety was already seen yesterday but there was no conviction and gold failed to hold onto its gains and now people are again getting nervous and that's pushing the market higher.”

In wider markets, the euro edged back towards the previous session's three-month low versus the dollar, while European and US stocks mostly steadied above earlier lows as investors used the two-day decline as an opportunity to pick up beaten down shares.

While gold tends to benefit from rising risk aversion if investors choose the metal as a safe store of value, it has also moved closely in line with stocks and the euro this year.



Investment interest in gold remained muted. Selling from gold-backed exchange-traded funds continued on Monday, with the largest, New York's SPDR Gold, reporting its biggest outflow in nearly a month, of 13.5 tonnes.

That brought its total outflow this year to 131 tonnes.

Traders are also looking ahead to the latest policy meeting of the Federal Open Market Committee, which begins on Tuesday.

Speculation that the Fed could withdraw from its monetary easing policy sooner than expected has pressured gold this year.

“(We) expect the FOMC to reaffirm its commitment to the current quantitative easing policy and to offer no hint that it will alter the policy in the near term,” HSBC said in a note.

“The FOMC may decide to update its strategy principles of how to 'exit' from QE at the coming meeting,” it added.

“Uncertainties surrounding the potential withdraw of QE contributed to gold's sell-off earlier this year. Given this, clarity on the FOMC's QE exit strategy may help ease such concerns and lend support to gold.”

Silver also reversed earlier losses, rising 0.5 perceent to $28.99 an ounce.

Meanwhile, platinum was down 0.6 percent at $1,566.74 an ounce and palladium was down 1.7 percent at $749.72 an ounce.

Gold extended its historically unusual premium over platinum to its highest since January 11 at nearly $50, as concerns over Cyprus pressured industrial commodities while lifting gold.

Platinum, chiefly used in autocatalysts, has traded at a discount to gold for much of the last year, but reversed that trend in the first quarter on growing optimism that steadier global growth would translate into a demand recovery.

However, carmakers still struggled, especially in Europe, a key market for platinum-heavy diesel catalysts.

Europe's car market shrank 10.2 percent in February, with sales of new vehicles falling to 829,359, according to figures from the Association of European Car Manufacturers. - Reuters