LONDON -- Gold prices finished higher in New York afternoon trade on Friday after a fall to two-month lows attracted physical buyers and bargain hunters back to the market, traders said.
But the metal had the potential to test new lows because of large speculative trading positions. Sentiment was also down because of a significant decline in gold held by a U.S.-based exchange-traded fund (ETF).
Gold fell as low as $653.40 an ounce the previous day, its weakest since March 20. It rose as high as $662.40 on Friday and was quoted at $660.80/662.30 by 4:03 p.m. EDT (2003 GMT), compared with $657.30/658.80 late in New York on Thursday.
Most-active gold for June delivery on the COMEX division of the New York Mercantile Exchange settled up $4.80 at $662.00 an ounce, after trading between $656.40 and $664.00.
"The market is very whippy," said David Holmes, director of precious metals sales at Dresdner Kleinwort. "The market had begun to focus on 'how low can it go'...and then the funds have come in this morning and bought it.
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"We've also seen some physical demand for gold this morning."
Several traders also noted good options buying in gold, citing one-year and 18-month calls.
Analysts watched the dollar as expectations the currency might firm in the weeks ahead could damage gold. The dollar was lower against the euro by afternoon on Friday.
"We do not believe we have seen the low in this correction and suspect there will be more losses to come over the next week," said John Reade, head of metals strategy at UBS Investment Bank.
The precious metal has tried three times this year to break through the psychological $700 level, with a view to taking out last year's 26-year high of $730 — but failed each time.
"While more physical support is expected with prices falling lower, the potential to see the $700 levels would seem a remote possibility at this point," Standard Bank said in a note.
DROP IN ETF HOLDINGS
The market hardly reacted to China's announcement of interest rate rises, but sentiment in the bullion market was down because of a substantial drop in gold ETF holdings.
U.S.-listed StreetTRACKS saw its holding falling by more than 6 percent in one month to 469 tonnes on Thursday. Nearly 17 tonnes were withdrawn in the past two days alone.
In industry news, gold hedging fell 4.12 million ounces to 39.89 million in the first quarter of 2007 from the previous quarter, and the full year decline was seen in the range of 8 and 10 million, said a report by metals consultant GFMS Ltd.
South Africa's Harmony Gold paid A$75.8 million ($62.39 million) to close out the remainder of its Australian hedge book totalling 230,000 ounces.
In other precious metals, Platinum edged higher to $1,307/1,311 an ounce from its previous finish in New York of $1,300/1,305.
Traders were keeping a close eye on wage negotiations in top producer South Africa as any suggestion of disruptions to supply flows could send prices higher.
Palladium rose to $360/364 from $356/360 late in the U.S. market on Thursday, while silver was quoted at $12.93/12.98, up from $12.80/12.84, its late quote New York on Thursday.
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