#Precious* Gold hits 2-1/2 month low on report of Ukraine ceasefire

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LONDON (Sept 3): Gold hit its lowest since mid-June on Wednesday after Ukraine said it had reached agreement with Russian president Vladimir Putin on a "permanent ceasefire" in its eastern Donbass region, before paring losses after Russia said no deal had been struck.

The Kremlin said on Wednesday President Vladimir Putin and Ukrainian leader Petro Poroshenko had agreed on steps towards peace in eastern Ukraine but a ceasefire had not been agreed between Moscow and Kiev because Russia is not a party to the conflict.

Spot gold hit a low of $1,261.19 an ounce after the initial report from Ukraine, but had edged back to $1,265.95 an ounce at GMT, little changed on the day. U.S. gold futures for April delivery were up $1.70 an ounce at $1,266.70.

Spot prices fell 1.7 percent on Tuesday, their biggest one-day drop since mid-July.

With stock markets rising, the dollar on a generally firmer footing and physical demand soft, the unrest in Ukraine and the Middle East had been a key factor keeping gold prices underpinned over recent months.

"Given there was little physical demand and shrinking investor consumption in August, geopolitical headlines were supportive with little other reason to keep bullion underpinned and maintain that 1275/80 support last month," VTB Capital analyst Andrey Kryuchenkov said.

"There is little support until $1,250," he added. "The market is bearish and we shall see a lot of technical selling now that we have closed below $1,275."

European shares were up 0.9 percent on Wednesday, having rallied to session highs after the Ukraine statement. Strength in equities this year has detracted some attention from gold, adding to price pressure on the metal.

Traders are now looking for direction to a European Central Bank policy meeting on Thursday and U.S. non-farm payrolls data on Friday.

The payrolls data is seen as a key barometer of the health of the U.S. economy. A weak reading may undermine expectations that the Federal Reserve will keep scaling back its gold-friendly monetary stimulus programme, potentially supporting the metal.


Physical demand in Asia was muted on Wednesday despite the previous session's price drop, traders said, which would usually be expected to tempt price-sensitive buyers.

"Light physical buying was evident around $1,265 but the potential for a further sell-off later in the week may keep buyers on the sidelines for now," MKS said in a note.

Investment interest in gold has been soft of late. SPDR Gold Trust, the world's largest gold-backed exchange-traded fund and a measure of investor sentiment, said its holdings fell 1.8 tonnes to 793.20 tonnes on Tuesday.

Among other metals, palladium was down 0.2 percent at $876 an ounce. The stand-off between major producer Russia and Ukraine helped push prices to 13-1/2 year highs at $910 an ounce this week, as trader worried that supply could be affected by the conflict.

Russia was the source of more than 40 percent of global palladium supply last year.

Silver was up 0.4 percent at $19.18 an ounce, while spot platinum was up 0.1 percent at $1,403.50 an ounce.