Gold Rebounds Back Above $1,700

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Gold rose on Thursday on short-covering ahead of a key U.S. nonfarm payrolls report and after comments from the European Central Bank's chief boosted expectations of an interest rate cut.

Bullion buying took off after ECB President Mario Draghi said the euro zone economy was likely to shrink next year as it has in 2012, and downside risks to growth prevailed for the region battered by a prolonged debt crisis.

The metal rebounded from the previous session's one-month low but gains faced resistance from technical selling around its 100-day moving average near $1,700 an ounce. Funds have been liquidating of late as open interest in U.S. gold futures, a gauge of market activity, fell to a three-month low.

"The loss of all of this open interest signals the institutions are moving to the sidelines until after an announcement on the 'fiscal cliff'," said George Gero, vice president of RBC Capital Markets, referring to talks aimed at resolving a potential U.S.budget crisis at the year-end.

Spot gold was up 0.4 percent at $1,699.71 an ounce. U.S. COMEX gold futures for February delivery settled up$8 an ounce at $1,701.80, with trading volume set to finish below its 30-day average, preliminary Reuters data showed.

The metal also tracked gains in U.S. equities after data showed the number of Americans filing new claims for unemployment benefits last week fell back to the pre-Superstorm Sandy range.

Gold / US Dollar Spot

"There is a preference for riskier assets and interest-bearing assets," Andrew Cole, fund manager with Baring Asset Management, said.

Gold investors are awaiting direction from nonfarm payrolls data on Friday, and next week's Federal Reserve policy meeting, as well as clearer signals on how the United States will deal with negotiations aimed at preventing $600 billion of tax increases and federal spending cuts.

The metal has been under pressure due to uncertainty over the budgetary measures, which could push the world's biggest economy back into recession. Investors' appetite for physical gold and physically backed investment products remained sharp, with holdings of the largest gold exchange-traded fund, SPDR Gold Trust, at a record high.

Demand in India, one of the world's biggest buyers of gold, was also firm as the rupee climbed.

Among other precious metals,silver was up 0.5 percent near $33 an ounce. Platinum rose around a percent to trade above $1,590 an ounce, while palladium climbed more than one percent to hover around $690 an ounce.