NEW YORK/LONDON (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 combined with 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 a lack of further monetary easing by central banks and heavy stop-loss orders below $1,750 triggered a sharp sell-off.
The decline in open interest and 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 market, traders said.
Gold has held gains above $1,700 an ounce throughout the session after it made its high and low for February all in Wednesday's session for a key reversal day, analysts said.
"The fact that it failed to break above a high near $1,800 signified a formidable level of resistance, and more importantly shows the bulls are just not ready to take the market back to new high territory," said Adam Sarhan, CEO of Sarhan Capital.
Spot gold was up 1.5 percent at $1,721.20 an ounce by 2:38 PM EST (1938 GMT), having hit a session low at $1,694.09 an ounce.
Analysts said the next important support levels are its 200-day average at $1,674 and $1,650 an ounce, where the metal found support during its last sell-off in late January.
"There is definitely a chance that gold can test its 200-day moving average. 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 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.
U.S. gold futures for April delivery settled up $10.90 an ounce at $1,722.20 an ounce.
Volume was heavy for a second straight session, about 20 percent above its 30-day average for one of the busiest sessions of the year, preliminary Reuters data showed.
Analysts said they expect gold to be steady after its bounce from lows under $1,700 an ounce, as the sell-off halted the steady increase in speculative net long positions held by money managers in the last two months.
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.
"Declines of this magnitude, however, often attract emerging-market buyers and may also interest potential central bank buyers," said James Steel, chief commodity analyst at HSBC.
A lack of demand for physical bullion in recent weeks meant gold had little fundamental support once selling got under way.
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.
Silver was up 2.4 percent at $35.43 an ounce. It also fell 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 emissions in cars.
Spot platinum was up 1.3 percent at $1,696.49 an ounce, while palladium was up 1.9 percent at $711.72.
US Gold APR 1722.20 10.90 0.6 1695.10 1726.40 211,061
US Silver MAY 35.661 1.019 2.9 34.455 35.705 56,304
US Plat APR 1701.10 8.50 0.5 1677.00 1704.30 7,661
US Pall JUN 716.75 8.35 1.2 699.00 719.60 3,916
Gold 1721.20 25.96 1.5 1694.09 1724.76
Silver 35.430 0.840 2.4 34.430 35.620
Platinum 1696.49 21.75 1.3 1678.50 1699.00
Palladium 711.72 13.25 1.9 700.00 716.00
US Gold 228,212 188,953 195,276 19.74 -0.83
US Silver 61,090 60,965 74,253 36.43 2.06
US Platinum 8,155 7,681 7,973 23 -0.94
US Palladium 3,929 5,419 4,705
Editing by David Gregorio