Gold ends higher, strong physical demand seen

NEW YORK/LONDON (Reuters) - Gold futures ended slightly higher on Tuesday as weaker stock markets bolstered bullion's appeal as an alternative investment.

"The gold market has been moving sideways, waiting for further development in the financial markets. As the stock market shows signs of prosperity, gold buyers will become more aggressive in returning," said George Nickas, commodity broker at FC Stone.

U.S. stocks turned lower sharply after rallying in the previous two sessions, as investors mulled whether recent gains have staying power. .N

Spot gold was at $773.25 at 2:42 p.m. EST, up 0.3 percent from Monday's close of $771.30.

U.S. gold for February delivery settled up $4.90 at $774.20 an ounce on the COMEX division of the New York Mercantile Exchange.

Gold held onto gains in spite of a sharp drop of oil, the other main external driver of gold. U.S. crude futures ended down nearly $2 at $42.07 per barrel.

Falling crude prices can undermine confidence in commodities as an asset class, and dent interest in gold as a hedge against oil-led inflation.

Meanwhile, market talk of a gold sale by the International Monetary Fund failed to dampen sentiment.

In April, the IMF had agreed to put its finances on sounder footing by selling some of its gold and investing in other asset classes such as bonds or equities.

However, approval of the U.S. Congress will be needed before any gold sales could begin.

PHYSICAL DEMAND SEEN SUPPORTIVE

In addition, resilient physical gold demand should boost prices in the near term, analysts said.

Thom Calandra, natural resources analyst and chief columnist for Stockhouse.com, said that high gold leasing rates and the lofty premium of gold coins and bars underscored strong physical buying.

"That demand is not currently reflected in the futures prices and other paper prices," Calandra said.

Among the other precious metals, platinum slipped a touch as investors worried slowing economic activity would hit demand for the metal, which is chiefly used to make catalytic converters.