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NEW YORK/LONDON (Reuters) - Gold edged higher on Tuesday, the day after it took its deepest dive in years and hit five-year lows, with many dealers bracing for more losses on expectations for a rise in U.S. interest rates and subdued demand from India.
In what traders called a "bear raid," sellers on Monday dumped an estimated 33 tonnes of gold in just two minutes on exchanges in Shanghai and New York, sending prices on a nearly $50 downward spiral from which they never fully recovered.
On Tuesday, spot gold XAU= was up 0.2 percent at $1,098.58 per ounce at 3:00 p.m. EDT, but traders remained uneasy due to another day of unusually large trading volumes in China, where many suspect the selling spree originated.
After sliding on Monday by more than 3 percent, the biggest one-day loss since September 2013, bullion is trading around the critical $1,100 an ounce support level. Another breach of that could lead to a further selloff, some analysts said.
U.S. August gold futures GCcv1 settled down 0.3 percent at $1,103.50 an ounce, their weakest settlement since February 2010.
A slide in the U.S. dollar and stock markets, coupled with gains for silver and palladium prices, may be giving gold bears "some pause for concern" on Tuesday, said analyst James Steel of HSBC in New York. Silver XAG= gained 1.1 percent, and palladium XPD= rose 3.4 percent, erasing Monday's losses.
"That implies this is not a bullion-wide selloff," Steel said.
But many feared more losses after Monday morning's wave of selling hit markets shortly after the Shanghai Gold Exchange opened.
Some traders and analysts speculate it originated from a Chinese entity, possibly a maneuver meant to push prices through critical support levels during a time of day when trading is light. A Japanese holiday further diminished liquidity.
Another 29 tonnes worth of gold changed hands on the Shanghai exchange on Tuesday, almost double its 16 tonne average daily volume last month.
(For GRAPHIC on gold market crash, click link.reuters.com/hux25w )
Ashok Shah, investment director at London & Capital investment fund, said upward blips were possible but doubted they would last.
"You are going to get some bear market rallies, but structurally the market has been broken, and over the six-month period you'll get the bear trend continuing," he said.
Dealers focused on demand in India, one of the world's biggest gold consumers. Some said the selloff failed to attract renewed buying there, while others disagreed.
"We do have the physical market getting nibbled at in India and other emerging markets," Steel said, adding they were attracted to the $1,100 level.
Investors have found less and less reason to hold gold as a safe haven following the international financial crisis, with the dollar strengthening before what is expected to be the first rate increase by the U.S. Federal Reserve in nearly a decade.
The slide has helped to wipe out half the gains from the last decade's historic bull run, taking prices back to the key chart level and threatening a break toward $1,000 an ounce.
But the price is unlikely to fall sharply again in the immediate short term, as it did when it fell 13 percent over two consecutive trading days in April 2013, analysts said.
"I wouldn't be surprised if gold starts to recover a bit back up $1,130 in the coming days, but my sense is that it is still going lower," Deutsche Bank analyst Michael Lewis said.
"At these levels we don't think gold is being considered cheap. That's why we wouldn't be saying to people this is their opportunity to buy because we have no real fundamental justification for gold to go up, given the imminent Fed rate hike and potential for more dollar strength."
Reflecting fading interest in gold, holdings in the SPDR Gold Trust investment fund fell to their lowest since 2008 (GLD).
Additional reporting by Manolo Serapio Jr in Manila; Editing by David Stamp and Lisa Von Ahn