Gold trimmed gains to end slightly higher on Friday, as better-than-expected U.S. jobs data reinforced fears that the U.S. Federal Reserve will rein in its stimulus program, ending a brief flurry of short covering by traders who had bet on lower prices.
Behind the subdued close was a volatile day's trade with prices whipsawed first by upbeat jobs data that sent prices close to five-month lows and then by short covering that sent the market up 1 percent after holding technical support.
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As concerns about imminent tapering of the Fed's stimulus after U.S. data showed the unemployment rate hit five-year lows returned, the gains faded.
"Now definitely a lot of people are thinking ... more aggressive tapering could be on the table," said Frank McGhee, head precious metals dealer at Chicago commodities brokerage Alliance Financial LLC.
"The metals are in a state of flux until we have more certainty about what actions the Fed's going to take".
Spot gold edged up 0.4 percent at $1,229.06 an ounce by 3:51 p.m. EST (2051 GMT), moving between a broad daily range between $1,211.80 and $1,243.
For the week, gold prices were down about 2 percent. Gold dropped sharply on Thursday as data showed the U.S. economy grew faster than estimated in the third quarter.
U.S. gold futures for February delivery underperformed spot prices, settled down $2.90 at $1,229.
For the most of the New York session, bullion climbed in tandem with the equity markets, a rare positive link between the two this year. Gold prices have plummeted amid fears that the Fed will tapering its stimulus this year even as the stock market kept rallying.
Comex floor option traders said unusually heavy trading of out-of-the-money options - Comex January puts at $1,200 per ounce and August $1,700 calls - on Thursday suggested some investors had bet on even higher prices on the jobs data.
Even so, traders had built up a massive short position earlier in the week in anticipation of strong U.S. jobs data.
On Friday, relatively thin trading made the market's moves more volatile, traders said. Volume was in line with its 30-day moving average, preliminary Reuters data showed.
Investors will now turn their focus to the Fed's December policy meeting on Dec. 17-18 for an indication of when the U.S. central bank may start to trim its $85 billion monthly bond-buying program, which has underpinned gold's rise in recent years.
Among other precious metals, silver took its cue from gold, rising 0.6 percent on the day to $19.44 an ounce. Platinum fell 0.2 percent to $1,354.74, while palladium dropped 0.1 percent to $731.50.
The platinum:palladium ratio - or the number of palladium ounces needed to buy an ounce of platinum - fell to its lowest in 11 years on Friday to around 1.8.
Strong demand from the auto sector and an unpredictable supply from above-ground stocks suggest a physical shortage could take place in the palladium market as early as next year, an executive at the Russia's Norilsk Nickel said on Thursday.
(By Frank Tang and Veronica Brown; Additonal reporting by A. Ananthalakshmi in Singapore; editing by David Evans and Jane Bairdvinc)