Gold rose the most in seven sessions on Tuesday, after breaking through a key technical level and as China inflation data boosted its appeal as a hedge against rising prices in the world's second-biggest buyer of the metal.

Bullion, down nearly 30 per cent for the year, came under renewed pressure late last week as a strong US jobs report raised fears of an early end to the US Federal Reserve's bond buying which has been seen as stoking inflation.

But it has now extended gains into a second day, as the dollar eased from three-year highs and on some bargain-hunting.

Data on Tuesday that showed China's annual consumer inflation accelerated more than expected in June also helped.
 
"The increase in Chinese inflation rates could see further appreciation around gold demand in China, which already appears to be persisting at elevated levels versus 2012," Nomura analysts wrote in a note.

"Rising inflation should hamper significant easing responses which should see this trend for enhanced Chinese gold demand continue."

Spot gold had risen 1.5 per cent to $1,254.91 an ounce by 0728 GMT, after climbing to $1,260.01 earlier. Comex gold  rose nearly $20 to $1,253.40.

Traders also attributed some of Tuesday's gains to technical buying once prices crossed $1,245, the level at which gold stood before nonfarm payroll data came out last Friday.

Bullion has fallen nearly 10 per cent since Fed Chairman Ben Bernanke said last month the economy was recovering strongly enough for the US central bank's $85 billion monthly bond-buying stimulus to be reduced as soon as later this year.

Gold for immediate delivery fell to $1,180.71 on June 28 to its lowest since August 2010.

Despite the rebound, gold continues to be undermined by liquidation in metal-backed exchange traded funds. SPDR Gold Trust, the world's largest gold ETF, said its holdings fell 1.56 per cent to 946.96 tonnes on Monday - the lowest since February 2009.

"The unwound gold positions increase gold supply and put gold under downward pressure, which in turn triggers more liquidations. We expect the spiral of liquidation to extend to 2014," said Helen Lau, senior metals and mining analyst at UOB Kay Hian Research.

Lau expects gold prices to decline by 20 per cent year-on-year to $1,332 in 2013, and another 10 per cent in 2014. - Reuters