Gold up 1.5% after 'Healthy' Correction

(Reuters) -- Gold rose 1.5 percent on Thursday, rebounding above $1,700 an ounce as the previous session's 5 percent plunge induced investors to buy at lower prices on hopes the tumble was a healthy correction rather than the start of a bear market.

Bullion climbed in heavy, choppy trade as gains in U.S.equities and crude oil on encouraging U.S. jobless claims data and technical support helped the precious metal find its footing, with stronger-than-average volume for a second day.

On Wednesday, open interest in U.S. gold futures lost nearly 20,000 lots for its biggest one-day drop since May 2011, as fears of no further monetary easing by central banks sparked a sell-off accelerated by heavy stop-loss orders below $1,750.

Analysts said the decline in open interest combined with gold's more than $100 tumble in high volume on Wednesday suggested that one or a few large hedge funds or institutional investors might have left the gold trade.

There is definitely a chance that gold can test its 200-day moving average. If we hold, it will be bullish. If we don't we may be moving into a near-term bear market, said Fred Schoenstein, a trader at Heraeus Precious Metals Management.

Spot gold was up 1.3 percent at $1,716.70 an ounce by 12:33 p.m. EST (1733 GMT), having hit a session low at $1,694.09 an ounce.

Spot prices fell more than 5 percent on Wednesday after U.S. Federal Reserve Chairman Ben Bernanke did not signal more monetary easing was imminent, which had been a key support of gold's 10 percent gains year to date.

Analysts said they expected gold to be steady after its bounce from lows under $1,700 an ounce and expected continuation of low interest rates and high liquidity.

In our view, the recent correction is temporary and does not question the mid- or long-term upward path of gold, BNP Paribas analyst Anne-Laure Tremblay said.

In Asian physical gold markets overnight, jewelers, traders and investors rushed to take advantage of the nearly $100 drop in prices.

Despite Wednesday's sell-off, bullion held by gold-backed exchange-traded products rose, with holdings of the largest, New York's SPDR Gold Trust, up 9 tonnes.

A lack of demand for physical bullion in recent weeks meant gold had little additional support once selling got underway after Bernanke's remarks.

U.S. gold futures for April delivery were down $6.70 an ounce at $1,718 an ounce. Volume was already 10 percent above 30-day average in late U.S. trade, preliminary Reuters data showed.

COMEX gold futures' open interest, a measure of market size that represents the number of active futures contracts in circulation, declined 17,303 lots, or 3.6 percent, to 461,741 lots as of Wednesday, CME data showed.

Traders said the fact that Bernanke did not signal more monetary easing was imminent prompted one or more big funds to exit gold futures.

Silver was up 1.6 percent at $35.14 an ounce. It alsofell more than 6 percent on Wednesday.

Better-than-expected U.S. auto sales helped sentiment in platinum group metals which are mainly used as catalytic converters to clean tailpipe emission in cars.

Spot platinum was up 1.2 percent at $1,695.50 an ounce, while palladium was up 1.6 percent at $709.97.