Gold defied a surging dollar and gained more than $1 an ounce in Asia on Thursday, aided by fresh physical demand as well as a technical correction, dealers said.
In Hong Kong, renewed buying interest pushed up gold bars to a premium of 20 US cents an ounce to London physical prices. Gold bars were at a discount of around 15 US cents an ounce two weeks ago, said dealers.
Gold bars were also at a premium of 20 US cents an ounce in Singapore, the entry point for much of bullion trading in Southeast Asia, due to steady buying interest from neighbouring Malaysia.
"My customers are covering their short positions. I heard the market is short of kilo bars," said Maggie Loh, a dealer at United Overseas Bank in Singapore.
Spot gold was trading at $391.50/392.25 an ounce, versus $390.00/390.75 an ounce last quoted in New York on Wednesday, when precious metals fell sharply on fund-led liquidation.
Gold, used for investment and jewellery, has fallen by around nine percent since touching a 15-year peak of $430.50 an ounce on January 6.
"There was some physical demand, but it's not as good as I have expected. Maybe, buyers are waiting for prices to fall further," said one dealer in Hong Kong, a key gold trading city in East Asia.
"Gold has firmed up because it had managed to hold above the key $388 support last night. There's a technical rebound, but I would expect India to come to the market soon," said the dealer, referring to the world's largest gold consumer.
The dollar rose to a five-month high against the euro on Thursday as investors interpreted comments by US Federal Reserve Chairman Alan Greenspan as leaning towards a rise in interest rates in the near term.
Although Greenspan said on Wednesday that inflation was not yet a threat, the market gave more weight to his comments the previous day, when he said that deflation a major reason behind low interest rates was no longer a problem.
That's why some bullion dealers remained cautious.
Higher interest rates tend to boost yields of US assets, increasing demand for the dollar. A strong dollar makes dollar-priced precious metals more expensive for holders of other currencies.
"Having fallen so quickly, there is now some propensity for gold to consolidate at current levels," said N M Rothschild in a report.
"However on Friday's close will be crucial. A close below $390 will open the way for further losses next week," it said.
A Sydney dealer said: "It's quite possible $390 will be broken, but again, the market would probably hold up at around $385.
"I expect the sell-off in silver to continue. It is quite possible it will go back down to $6."
Silver was quoted at $6.24/6.27 an ounce, compared with $6.26/6.29 last quoted in New York and well below a 17-year high of $8.43 an ounce in April.
Palladium was at $282/287 an ounce, versus New York's $290/295.
Platinum was trading at $882/887 an ounce, down from $886/891.
The benchmark December gold contract on the Tokyo Commodity Exchange (TOCOM) shed two yen per gram to 1,377 yen.