LONDON -- Gold rebounded Friday after the previous session's 2 percent sell-off, as the dollar slipped after a surprise fall in U.S. retail sales, but analysts expect prices could retest the recent five-week lows as risk-averse investors trim their holdings.
Spot gold was up at $671.00/671.50 an ounce by 2:42 p.m. EDT (1842 GMT) from $667.00/667.50 late in New York Thursday, when it sank to $664.00, the lowest level since April 4, on a dollar rally and a sell-off in equity markets.
Most-active gold for June delivery on the COMEX division of the New York Mercantile Exchange settled up $5.30 at $672.30 an ounce amid heavy volume, after prices also hit a five-week low Thursday.
Traders said short positions — bets on lower prices — were being reversed after data showed tumbling U.S. retail sales and subdued inflationary pressures.
"It took a while, but the dollar came off after the data, people started to think about rate cuts," a London-based trader said. "Higher oil prices will help precious metals."
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A weaker U.S. currency makes dollar-denominated metals cheaper for investors in other currencies, while gold is often used as a hedge against oil-led inflation.
However, even though the dollar is lower, it is still near one-month highs against the euro.
That, combined with Thursday's stock market losses, points to a nervous mood among investors, who are likely to sell their holdings, including gold, much as they did earlier this year.
"There's a whiff of risk aversion in the air, and that seems to be encouraging people to reduce risk," said John Reade, analyst at UBS, adding that many asset prices had returned to levels before the correction started in February.
ETF OUTFLOWS
Late in April gold touched $693.6, the highest level since the middle of May. Losses since have been triggered by investor selling on disappointment with the metal's failure to breach the psychological $700 level.
Gold bulls expected prices would eventually test the 26-year highs of $730 an ounce set last May.
But that hope faded and gold's prospects could deteriorate further if U.S. Treasury Secretary Henry Paulson's support for a stronger dollar is the beginning of a new trend.
Analysts also cited heavy sales by European central banks for gold's decline. The Bank of Spain on Thursday said it sold 1.3 million ounces of gold from its reserves in April and another 1.3 million ounces in March.
Another major indicator of investor sentiment is the volume of flows into and out of exchange-traded gold funds.
The New York-listed StreetTracks gold fund, the world's largest gold ETF, which accounts for about 80 percent of the metal jointly held by such funds, lost more than five tonnes between Wednesday and Thursday.
"We tend to concur with the ETF trends," JPMorgan said in a note. "Combined with a weak volatility environment, the most likely outcome in the very short term is further selling on rallies towards the top end of the $685 to $695 ounce range."
Silver touched a low of $12.93 an ounce in early trade, the weakest level since March 15. It has since recovered and was last quoted at $13.19/13.24, compared with its previous finish of $13.04/13.09 late on Thursday.
In platinum group metals, the annual gathering in London next week for the platinum industry, known as Platinum Week, could attract some buying.
Platinum rose to $1,328/1,333 an ounce from $1,310/1,315 in late in New York on Thursday. Earlier it hit a one-week low of $1,306. Palladium saw a one-month low of $357 and was last quoted at $364/367 an ounce, up from $358/361, its previous close in New York.
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