UPDATE 7-Gold ends higher after 4-mth low; volatility seen

(Recasts, updates with analyst comment, closing prices, market activity, adds NEW YORK to dateline)

By Frank Tang and Atul Prakash

NEW YORK/LONDON, May 2 (Reuters) - Gold ended higher on Friday, recovering from an initial four-month low, with analysts expecting future volatility to be driven by gyrations in the greenback and possible fund sales.

Spot gold XAU= fell as low as $845 an ounce after the dollar jumped following better-than-expected U.S. jobs data, but the metal rebounded when the price dipped below $850 an ounce and attracted fresh buyers, analysts said.

It was at $855.80/857.00 by New York's last quote at 2:15 p.m. EDT (1815 GMT) against $850.25/851.65 in New York late on Thursday.

"It will stay very volatile for sure and we need to have our eyes on the forex market so when the dollar is able to recover more, $800 is probably the next target on the gold side," said Michael Kempinski, senior precious metals trader at Commerzbank.

"I think the physical off-take is not enough to absorb all the selling which is coming out of the funds which still have massive long positions," he said.

The dollar jumped to two-month highs versus a basket of major currencies after data showed the U.S. economy lost just 20,000 jobs in April, fewer than economists had forecast. [ID:nN02320385]

The U.S. jobs report bolstered expectations that the Federal Reserve may be nearing the end of its rate-cutting cycle and backed a growing view that the U.S. economic slowdown may not be as deep as some originally thought. [ID:nN02551119]

A firmer dollar makes gold costlier for holders of other currencies and often lowers bullion demand. The metal is also generally seen as a hedge against oil-led inflation.

Oil CLc1 rebounded after three straight days of falls, drawing support from the U.S. data. U.S. crude futures ended up $3.80 at $116.32 a barrel.

GOLD LOSES 'FLAVOUR'

Some analysts expected the gold market to hold above the $850 level.

George Nickas, broker with FC Stone in New York, said that longer-term traders still believed that holding long positions in gold was the best strategy given gold's positive market fundamentals.

"The short-term down trend might be coming to an end," Nickas said.

Wolfgang Wrzesniok-Rossbach, head of sales at Heraeus, a German precious metals trading group, said that if gold broke down convincingly, the whole precious metals complex might go down further.