Gold rose to settle higher on Tuesday after physical buyers of bullion grabbed the chance offered by the previous session's record-breaking one-day drop, but investors expected more falls.
Bullion on Monday recorded its biggest ever daily fall in dollar terms — at one point it was down $142 an ounce — catching gold bulls, speculators and veteran investors by surprise.
Gold has 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.
"We have had technical barriers broken in the past two days, while the overall macro environment has being moving away from the inflation bias ... and some institutional investors are rethinking their positions in commodities in general and gold specifically," Deutsche Bank analyst Daniel Brebner said.
Spot gold, lost 8.5 percent on Monday and dropped further to $1,321.35 an ounce, its lowest since January 2011, earlier on Tuesday.
It later reversed direction, spurred by physical buying and helped by a weaker dollar against the euro, to briefly rally above $1,400 to a session high of $1,401.24 an ounce, up 3.6 percent. Prices last rose 2.2 percent to around $1,383 per ounce.
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 program.
"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," said Alan Miller, CIO of SCM Private, an investment management firm, in a note.
U.S. gold futures fell more than 2 percent to the weakest in more than two years before rebounding to settle $26.30 higher at $1,387.4 per ounce.
In wider markets, the dollar fell against the euro, although remaining strong versus the yen. Stocks on Wall Street rose, while data that showed U.S. consumer prices fell in March left room for the Federal Reserve to keep up bullion-friendly economic stimulus efforts.
Rout of 1980 Eclipsed
Monday's drop in spot gold, closing down around $125 an ounce, eclipsed the rout on Jan. 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 program, 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 jewelers following the latest sell-off, but there were no signs of buying related to tensions between the two Koreas or bombings in Boston on Monday, which killed three people.
(Read More: Stock Market Seeks Answers on Boston Blasts)
Premiums for gold bars edged up to $1.70 to the spot London prices in Singapore on Tuesday from $1.20 the previous day, but dealers had yet to see a surge in demand from jewelers 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. Spot platinum was last up 3.9 percent to $1,448 an ounce and palladium rose 3.5 percent to $675 per ounce. Silver also rallied 4.3 percent to about $23 per ounce after dropping 12.6 percent on Monday.