Strong physical buying helped pluck gold from a 6-week low on Wednesday after China

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said bullion would not become a major investment home for its foreign exchange reserves. The State Administration of Foreign Exchange said U.S. Treasury securities would remain an important market for the managers of China's official currency reserves, but gold would not become a major component of the central bank's portfolio.

Gold dropped to $1,188.60 an ounce, its weakest since May 25, before bouncing to $1,191.45 by 0535 GMT, hardly changed from New York's notional close. "I just came back from lunch and saw good buying, including from Indian jewellers. Clients are hungry for more physical gold now," said a physical dealer in Singapore.

Bullion has dropped more than 5 percent since striking a record above $1,264 an ounce in late June, but turmoil in the financial markets could offer investors a safe haven. Gold had struck a lifetime high on worries the euro debt crisis was spreading and the U.S. economy was slowing.

"I wouldn't be surprised to see gold recover back above $1,200 an ounce or may be move even higher in the near term," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "At the end of the day, I think the uncertainties in the international economic environment remain significant and they will be supportive for the gold price in the near term."

US gold futures for August delivery fell $3.7 to $1,191.4 an ounce. The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings slipped to 1,316.481 tonnes by July 6 from 1,318.915 on July 2. The holdings hit a record at 1,320.436 tonnes on June 29. "At this stage, I wouldn't read too much into that," said Moore, referring to the decline in ETF holdings.

"I don't think it's inconsistent with what we're just talking about... may be some profit taking and things like that." The Nikkei edged down on Wednesday as shares of exporters that rose the day before gave back some gains, even after Wall Street's Tuesday rebound that ended a five-day string of losses. The physical sector was active in Singapore and Hong Kong, and steady demand from jewellers and other physical buyers across Asia led to supply tightness.

"We've been selling gold since last week, but it's difficult to get hold of materials within a short period," said another physical dealer in Singapore, who trades gold bars. "The market may also turn around too quickly. That's why it's difficult for both customers and sellers," he added. The euro dipped on Wednesday but was still hovering near a recent seven-week high, with traders saying it could rise further in the near term due to doubts about a recovery in the U.S. economy and positive technical signals.