Gold recovers in Europe, trades in tight band

LONDON, Feb 24 (Reuters) Gold rebounded to trade above 0 an ounce on Friday as strength in oil prices and a fall in the dollar against the yen encouraged some buying.

The metal stayed in a tight band, with people avoiding big moves ahead of the weekend and waiting for fresh leads that might set a clear trend.

''I still want to see this correction find some decent physical demand ... Once we can prove that physical demand is actually going to support gold, that will encourage people to take gold higher again,'' said John Reade, precious metals analyst at UBS Investment Bank.

He said gold prices might fall in the near term but the medium-term outlook was positive.

Spot gold rose to as much as 2.50 an ounce before easing to 0.40/551.30 by 1033 GMT (1603 IST), still up from 8.40/549.30 in New York late on Thursday when it slipped nearly 1 per cent on fund and technical selling.

After hitting this week's high of 6.60 on Monday, gold struggled to break the level as price rises were blocked by profit-taking by funds.

James Moore, analyst at TheBullionDesk.com said the short-term outlook for gold remained mixed, with traders closely monitoring moves in currency and oil markets on the last working day of the week.

''Recently the trend has been a little bit of safe-haven positioning ahead of the weekend,'' he said.

Gold hit a 25-year high earlier this month on fund buying, fuelled by high oil prices, expectations of long-term weakness in the dollar and tensions over Iran's nuclear programme. But it slipped as low as around 5 last week.

''We had a very good run. You have a pullback and correction at some stage and we are in a process to do that at the moment,'' Reade said.

Traders, who sold their positions in early Asian trade in anticipation that gold futures on the Tokyo Commodity Exchange futures would fall, bought back overnight as oil prices firmed and Tokyo prices rebounded from their lows.

Oil climbed back up above a barrel as worries over disruptions to Nigerian exports resurfaced. The yen surged to one month-highs against the dollar.

Gold is often seen as a hedge against inflation, while a drop in the dollar makes the metal cheaper for holders of other currencies.

In other precious metals, platinum rose to ,026/1,030 an ounce from ,017/1,021 in New York, while silver edged up to .55/9.58 from .49/9.52.

Palladium was at 3/287 an ounce, compared with 283.50/287.50.

REUTERS SD PM1653