Gold fell on Tuesday as Asian shares bounced off three-year lows and the US dollar rebounded from a brutal selloff in the prior session that was fuelled by fears over the fate of the Chinese economy.

Palladium was the worst-hit among precious metals, slumping more than 7 per cent at one stage to its lowest since 2010, adding to a 5 per cent slide on Monday.

Some Asian stocks recovered in tandem with US futures even as Chinese shares tanked further. The dollar gained versus a basket of currencies after falling the most since 2011.

“If that remains the case over the course of this session then buying interest in gold could dry up,’’ said Michael McCarthy, chief market strategist at CMC Markets in Sydney.

Spot gold was down 0.5 per cent at $1,149 an ounce by 0701 GMT. It closed slightly lower on Monday after a five-day rally that lifted it to $1,168.40 on Friday, its loftiest since July 7.

US gold for December delivery slipped 0.4 per cent to $1,148.50 an ounce.

Gold was among the least bruised by Monday’s selloff, dropping half a per cent versus a 6 per cent slide in Brent crude and a 2 per cent decline in copper.

A near-9 per cent dive in China shares sent global stocks and commodity prices tumbling overnight. That helped gold hold up as uncertainty over the global economy boosted investor appetite for safe-haven assets.

“Gold should continue to hold its value during the current market turbulence, however, a material surge higher is unlikely as participants find liquidity by selling all asset classes, including precious metals,’’ MKS Group trader James Gardiner said in a note.

Fed rate hike

Also, potentially limiting gold’s upside potential, a key Federal Reserve official stuck to his view that a US interest rate hike would happen this year.

Atlanta Fed President Dennis Lockhart said the Fed will likely begin raising rates “sometime this year’’, even as the steep drop in oil prices clouds the inflation outlook.

CMC Markets’ McCarthy believes a US rate hike can still happen next month.

"The Fed is focused on the underlying economy, not the share market. They want to normalise rates so that they have room to move should another crisis emerge," he said.

Spot palladium fell to as much as $528.50 an ounce, its lowest since September 2010, before paring losses to trade at $546.50, down 4.3 per cent.

Platinum dropped 1 per cent to $978 an ounce and silver was steady at $14.76.

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