From Rout to Rush—Gold Stages Quiet Rally

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Gold is clawing its way back up amid signs that demand for the precious metal is soaring a week after a massive sell-off sent prices to their lowest level in more than two years.

Hopes of central bank buying and signs of surging demand for physical gold are helping the battered metal bounce back. News on Wednesday from the International Monetary Fund that Russia and Turkey raised their gold reserves in March helped trigger the latest gains.

Gold prices rose 1 percent to about $1,446 an ounce on Thursday, its highest level in more than a week. They are up about 10 percent from a low hit last Monday when the market suffered its biggest ever one-day drop.

"One of the interesting things we've seen is the dramatic pick-up in physical purchases and it has been astronomical," said Jonathan Barratt, founder of the commodities newsletter Barratt Bulletin, in Sydney.

"People want to hold physical gold at this level and that's not just in India," he said, referring to the world's biggest consumer of gold. "In Australia, we had a queue outside one of our bullion houses about half-a-kilometer long and I haven't seen something like that for years."

(Read More: How Gold's Fall Will Affect World's Biggest Consumer)

In another sign of surging demand for gold after last week's rout, the U.S. Mint said this week it had suspended sales of its one-tenth ounce American Eagle gold coins.

Analysts say that the Japanese are among the strongest buyers of gold, which they see as refuge from a weak yen and the prospect of inflation finally returning to Japan.

(Read More: After 'Shock and Awe,' What Next From the BOJ?)

"With expected inflation in Japan, there is an expected demand from Japanese investors to use hedges like gold," said Hon Cheung, regional director for the Official Institutions Group, State Street Global Advisors, Asia Pacific.

"The medium/longer concern remains the ultimate unwinding of the large global pool of liquidity caused by the stimulus efforts [of central banks]," he added. "Here gold continues to have an important role to play as a potential hedge against this risk."

Gold One-Month Chart

Enter the Central Banks

This month's sharp fall in gold saw prices slide about 15 percent over two days in a rout that took many investors by surprise. One trigger for the heavy selling was talk that Cyprus, the tiny beleaguered euro zone state, was mulling plans to sell its gold reserves.

Analysts said that despite bearish sentiment, central banks were likely to continue their gold purchases as they look to diversify their asset holdings.

(Read More: Central Banks Bought Most Gold in Nearly 50 Years)

"If the central banks were happy to buy gold at $1,550 then it's a lot cheaper down here. So, if you're a central bank that is diversifying then you would look at it," said Barratt.

"The fundamentals for gold are all the same, only the market's a lot cheaper and people are realizing that and that's why they are coming back to it," he added.

Others said it would take much longer for the bearish sentiment to subside. "Gold has experienced the worst rout since the 1980s and is now in a technical downtrend," Credit Suisse said in a note published earlier this week.

- By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter @DharaCNBC