NEW YORK/LONDON Gold rose 1 percent on Thursday, snapping three consecutive days of losses on a dollar drop and technical purchases, but heavy put buying and disappointment over Federal Reserve easing could still pressure the metal.
Gold followed riskier assets, with the S&P 500 stock index .SPX ending above 1,400 for the first time in four years after a strong run of U.S. job and manufacturing data confirmed a decent pace of economic recovery.
The metal's nearly 5 percent or $80 per ounce slide over the previous three days has removed a premium based on expectations of further U.S. monetary easing. The Fed offered few clues this week on any further action after it said in late January it would keep rates near zero for the next few years.
"Today is just a short-covering rally. We are seeing heavy put buying right now -- I think we have the potential to get down to $1,600 or below," said Mihir Dange, a COMEX gold options floor trader for Arbitrage LLC.
Dange said gold's rally quickened around 1:00 p.m. EDT (1700 GMT) as oil came off early lows. Crude fell $2 a barrel after Reuters reported that the United States and Britain were preparing a release from strategic oil reserves this year.
Spot gold was up 1.1 percent at $1,659.56 an ounce by 3:05 p.m.
It is heading for a loss of about 3 percent for the week, its second-biggest weekly drop for the year and a third consecutive weekly decline.
U.S. gold futures for April delivery settled up $16.60 at $1,659.50 an ounce, with volume more than 10 percent above its 30-day average but sharply below the pace in the previous session.
With bullion now trading well below its 200-day moving average, gold appears to be finding support after initially falling toward $1,625 an ounce, an area near its lows from mid-January, analysts said.
The metal also remains technically underpinned by a bullish reverse head-and-shoulder pattern.
U.S. DATA, FED EASING HOPES
Some funds appear to have closed out of their bullish gold bets, fearing the Fed could be done with quantitative easing after it upgraded its economic outlook this week.
"I don't believe the economy is out of the woods yet. I think we could be sitting here in another two to three months talking about QE3 again very easily," said Joe Foster, portfolio manager of the $1.4 billion Van Eck International Investors Gold Fund.
"Gold's been consolidating since September, so we can see further weakness very easily," Foster said.
Gold fell toward $1,500 an ounce in late December, when it briefly entered a bear market after it had plummeted more than 20 percent from an all-time high above $1,920 in September.
Investors have stuck with gold for now, pushing holdings of the metal in the world's largest exchange-traded products to record highs this week. In Asia, the price drop also encouraged a revival in demand, particularly in top consumer India.
In other precious metals, silver was up 1.4 percent on the day at $32.56 an ounce.
Platinum rose 0.6 percent to $1,680.24 an ounce, pushing the premium to gold to more than $20 an ounce. Palladium was up 1 percent at $702.01 an ounce.
(Additional reporting by Lewa Pardomuan in Singapore)