(REUTERS) --Gold rose on Thursday, as investors covered short positions after a sharp two-day pullback, and a crude oil rally also buoyed the precious metal that sank early this week on disappointment about further U.S. monetary easing.
Bullion rebounded from its biggest two-day drop in a month after it steadied above psychological resistance at $1,600 an ounce, where investors had placed heavy put options to protect against further losses.
Trading volume was thin ahead of Friday's key U.S. nonfarm payrolls report and the Good Friday holiday in most Western markets. Gold remained on track for a weekly decline exceeding 2 percent after minutes of the latest Federal Reserve policy meeting doused hopes for further U.S. monetary stimulus.
Market watchers said some hedge funds might have reduced gold holdings due to stronger U.S. economic data and easing of fears about European debt.
A lot of the gold trade by hedge funds was specifically tied to a new round of Fed stimulus, said Jeffrey Sica, chief investment officer of SICA Wealth Management with more than $1 billion in assets.
If there is any perception that momentum in gold will taper, hedge funds will take the opportunity to sell. Gold is always vulnerable because of how well it has done, he said.
Spot gold was up 0.6 percent at $1,628.31 an ounce by 2:36 p.m. EDT (1836 GMT). Gold briefly broke back above $1,630 an ounce as a drop in U.S. weekly initial jobless claims pulled the dollar from its highs and stocks from their lows, but was unable to sustain the move.
U.S. gold futures for June delivery settled up $16 percent at $1,630.10 an ounce, with trading volume about halved of its 30-day average, preliminary Reuters data showed.
Gold has fallen 2.3 percent so far this week, the third-worst weekly drop of the year, retreating further from the March high above $1,790 an ounce on hopes of more Fed stimulus.
Dennis Gartman, a veteran trader, said that gold on weekly charts suggested the metal has been in a bearish trend since the first quarter of 2011 as each new interim low has been lower than the previous one. Gartman added that gold's uptrend on weekly charts has been clearly broken.
QE HOPES DASHED?
Analysts said that gold's record high at above $1,900 an ounce in September 2011 reflected the premium of a third round of Fed asset buying known as quantitative easing (QE).
The metal had dropped 3.5 percent in the previous two sessions as the market had largely factored in QE3 after the U.S. central bank in January said it would keep rates near zero until 2014.
However, INTL FCStone metals analyst Edward Meir said he cannot rule out the possibility of U.S. economic recovery topping out, which could boost precious metals as the Fed brings the easing option back onto the table.
Among other precious metals, spot silver was up 1.1 at $31.67 an ounce, spot platinum edged up 0.2 percent at $1,595.19 an ounce, and spot palladium gained 2.1 percent at $642.70 an ounce.