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Gold rallies 1 per cent on short covering, drop in dollar

[SINGAPORE] Gold jumped nearly 1 per cent on Tuesday, extending gains above a near-six-year low on short covering and as the dollar dipped from multi-month highs.

Spot gold rose to a session high of US$1,074.34 an ounce, before giving up some gains to trade up 0.7 per cent at US$1,071.60 by 0643 GMT. It had gained 0.5 per cent on Monday.

The dollar dipped against a basket of currencies after hitting an eight-month high in the previous session.

Speculators are holding record short positions in COMEX gold futures due to a looming US interest rate hike, but this could help gold prices in the near term, said analysts.

"Gold has the potential for further short covering to take prices higher, especially if emerging market physical demand stays strong," HSBC analyst James Steel said.

But the key influences on gold this week would be the European Central Bank meeting on Thursday and the US nonfarm payrolls report on Friday, he said.

If prices can hold above the US$1,070 resistance level, more gains can be seen, said MKS Group trader James Gardiner.

Gold's gains over the last two days have taken it away from US$1,052.46, the metal's lowest since Feb. 2010 hit last week. Bullion posted its biggest monthly drop in 2-1/2 years in November with a 7-per cent decline.

Investors have been positioning for a US rate hike, expected this month at the Federal Reserve's Dec. 15-16 policy meet, by selling non-interest-paying gold.

Hedge funds and money managers raised their net short position in COMEX gold to the biggest on record in the week to Nov 24, data showed on Monday.

Assets in SPDR Gold Trust, the world's top gold-backed exchange-traded fund, are at their lowest since September 2008.

Friday's US payrolls report will be closely watched for clues about the strength of the economy and its impact on the Fed's monetary policy. A strong number, after a surge in job growth in October, could cement expectations that the central bank will deliver its first hike in almost a decade.

The ECB meeting will be eyed for any impact on the currency markets.

In the physical markets, there were signs of robust demand.

The US Mint's sales of American Eagle coins surged in November, with gold nearly tripling month-over-month and silver already reaching a new annual record as bullion prices fell to multi-year lows.

Premiums on the Shanghai Gold Exchange, an indicator of buying strength at top consumer China, were at a healthy US$5-$6 an ounce.