Tokyo gold retreats after heavy fund sell-off

TOKYO, May 17 (Reuters) Tokyo gold futures recoiled on Thursday after a steep fall in New York, where heavy liquidation by funds helped send gold futures to their lowest finish in two months.

Analysts said further fund selling was likely on any gains, curbing investor appetite in Tokyo. This could reverse a recent rise in open interest, a barometer of liquidity, that signalled a return by investors to the gold market.

Spot gold edged higher after touching a six-week low of $659.40 an ounce the previous day.

It traded at $663.30/663.90 as of 0639 GMT, up from $661.60/663.10 late in New York.

Benchmark gold futures contract for April 2008 delivery on the Tokyo Commodity Exchange closed at 2,608 yen ($21.60) a gram, down 20 yen or 0.8 percent from Wednesday's close. It moved in a range of between 2,602 and 2,609 yen.

''We cannot just shrug off a more than $10 fall in the New York market,'' said Tatsuo Kageyama, analyst at Kanetsu Asset Management.

The most-active gold futures contract for June delivery on the COMEX division of the New York Mercantile Exchange dropped $13.10 an ounce to $661.50 on Wednesday.

''I don't think selling by funds is over yet,'' Kageyama said. ''In Tokyo, the chances of a market rally look slim.

Instead, a fall below 2,600 yen would trigger a wave of selling to lock in profits,'' he said.

The April contract rose as high as 2,634 yen on Monday, reflecting strong interest by domestic investors to buy on dips. The contract hit a one-month trough of 2,586 yen on Friday. It has since floated between these two levels.

Worries that a dispute over a pay deal in Latin America's biggest gold mine, Peru's Yanacocha, could result in a strike, also weighed on sentiment.

The market largely took in its stride a report of a rise in global gold demand in the January-March quarter.

Industry-sponsored World Gold Council said late on Wednesday that gold demand in the first quarter rose 4 percent year-on-year to 831.7 tonnes as less volatile prices boosted jewellery consumption.

Platinum futures fell in line with gold futures, and selling hit the nearby months harder than distants, reflecting doubts over earlier market views of a tight supply.

A supply shortage often puts a market in backwardation, a condition where prices for nearby months are higher than for later months.

The benchmark April contract fell 4 yen a gram or 0.1 percent to 5,017 yen. It moved in a range of between 4,993 and 5,023 yen.

The nearby June contract slid 17 yen to 5,119 yen.

The spread between the two contracts narrowed to 102 yen on Thursday, the smallest since May 2.

On Monday, the April contract touched a record high for any benchmark of 5,031 yen, bolstered by hopes for a boom of exchange-traded funds.

Spot platinum stood at $1,314/1,319 an ounce, down from $1,324/1,329 in late New York.

Cash palladium traded at $356/360 an ounce, little changed from $357/361 in New York, and silver inched down to $12.85/12.90 an ounce from $12.88/12.91.

Precious metals prices at 0652 GMT Last Net Change Pct Move Turnover (lots) TOCOM Gold 2608.00 -20.00 -0.76 44431 TOCOM Platinum 5017.00 -4.00 -0.08 27274 TOCOM Silver 500.10 -10.60 -2.08 2124 TOCOM Palladium 1408.00 -10.60 -1.12 757 Spot Gold 663.50 Spot Platinum 1315.00 Spot Silver 12.87 Spot Palladium 358.00 Change so far in 2007 Metal Latest bid End prev year Pct Move TOCOM Gold 2608.00 2445.00 +6.67 TOCOM Platinum 5017.00 4254.00 +17.94 TOCOM Silver 500.10 493.30 +1.38 TOCOM Palladium 1408.00 1255.00 +12.19 Spot Gold 663.50 636.10 +4.31 Spot Platinum 1315.00 1132.00 +16.17 Spot Silver 12.87 12.85 +0.16 Spot Palladium 357.00 332.00 +7.53 Euro/Dollar $1.3537 Dollar/Yen 120.89 TOCOM prices in yen per gram, except for silver which is in yen per 10 grams, spot prices in $ per ounce.

($1=120.71 yen) REUTERS PV DS1408