Gold ends higher on heightened tensions over Ukraine

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Gold ended higher on Wednesday, as lingering tensions over Ukraine and a dollar drop prompted bargain hunting and short-covering after bullion prices fell to an earlier 2-1/2 month low.

The yellow metal was under pressure earlier after Russian President Vladimir Putin said on Wednesday a deal to end fighting in eastern Ukraine could be reached this week. However, Ukraine's prime minister later rejected Putin's proposals, saying they were an attempt to deceive the West on the eve of a NATO summit.

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U.S. gold futures for December delivery settled $5.30 higher at $1,270.30 an ounce. Spot gold was last at $1,270 an ounce, up 0.4 percent on the day.

Muted response from physical buyers despite Tuesday's 1.7 percent drop and heightened geopolitical tensions suggested gold's upside could be limited, analysts said.

Gold / US Dollar Spot

"We believe the lack of physical demand makes gold more vulnerable to the downside should U.S. employment data surprise on the upside this Friday," said Edel Tully, precious metals strategist at UBS.

Gains in gold on Wednesday were capped by more encouraging U.S. economic news as rising new orders for factory goods and strong automobile sales offered further signs of strength in the manufacturing sector.

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Physical demand in Asia was muted on Wednesday, despite the previous session's price drop, traders said, which would usually be expected to tempt price-sensitive buyers.

Bullion trader and refiner MKS said in a note that light physical buying was evident around $1,265, but the potential for a further sell-off later in the week may keep buyers on the sidelines.

Investment interest in gold has been soft of late. SPDR Gold Trust, the world's largest gold-backed exchange-traded fund and a measure of investor sentiment, said its holdings fell 1.8 tonnes to 793.20 tons on Tuesday.

—By Reuters