Gold recovers from 4-1/2 year low ahead of US jobs data

By Jan Harvey

LONDON (Reuters) - Gold prices edged higher on Friday, recovering from a sudden early slide to 4-1/2 year lows, as traders took to the sidelines ahead of U.S. non-farm payrolls data later.

Gold is set to fall for a third straight week, having struck its weakest since early 2010 on Friday at $1,131.85 an ounce, after the dollar rallied on economic optimism and expectations the Federal Reserve could raise rates sooner rather than later.

A payrolls reading supporting that view would likely drive gold lower still, traders said, while a weak report on what is a key barometer of the health of the world's largest economy would trigger a strong rally after this week's losses.

Spot gold was up 0.3 percent at $1,144.09 an ounce at 1010 GMT, while U.S. gold futures for December delivery were up $1 an ounce at $1,143.60.

After subdued trading early on, U.S. gold futures slid 1 percent to $1,130.40 an ounce, their lowest since March 2010, on high volumes. In the five minutes to 0500 GMT nearly 5,000 lots changed hands.

But at around 0635 GMT, prices popped about $10, again on high volumes.

"The market is extremely nervous ahead of the non-farm payrolls, and that may be one of the reasons why the $1,140 area was breached," Afshin Nabavi, head of trading at MKS, said.

"The news coming out of the United States has been so good that everyone is banking on a good number again... and a bad reaction on precious," he said. "However, if the number is bad, the reaction on the upside should be much (stronger)."

A precious metals trader in Hong Kong said the sharp drop in gold was due to stop-loss orders below $1,138.

"The move back up could be because the dollar gave up some gains then, but that is just noise. I think we are going to see declines in gold for a while," he said.

As investors await monthly U.S. jobs data, European shares edged higher, supported by signs on Thursday that the European Central Bank is edging towards providing more help for the moribund euro zone economy. [MKTS/GLOB]

The dollar index was little changed.

BREAK OF CHART SUPPORT

Gold has been selling off sharply since last Friday when the metal broke through $1,180 - the lowest level reached during a 28 percent plunge last year.

Since then, the strength in the dollar and breaks below more key technical levels have continued to drag on gold.

Buying remained subdued in China, the world's top consumer of the metal. Investors there typically buy jewellery, bars and coins whenever prices fall, providing a floor to markets, but that has been absent as consumers anticipate further falls.

Chinese prices were trading at a premium of $1-$2 an ounce to the global benchmark on Friday. During last year's price plunge, Chinese premiums for gold climbed to around $50 an ounce at one point.

In a reflection of market sentiment, SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 0.41 percent to 732.83 tonnes on Thursday - a six-year low. [GOL/ETF]

Silver was up 0.3 percent at $15.41 an ounce. Earlier it hit the lowest since February 2010 at $15.03 an ounce.

Silver is the worst performing precious metal this week, down 4.4 percent, followed by palladium, which is down 4.2 percent.

Spot platinum was up 0.4 percent at $1,191.75 an ounce, while spot palladium was up 0.8 percent at $752.97 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Michael Urquhart)