NEW YORK, Oct 29 (Reuters) - COMEX gold rebounded off the $380 an ounce psychological level Wednesday, with hedging against expiring cash options dominating early gyrations before short covering took over in the afternoon, dealers said.
In the run up to the monthly expiration of over-the-counter options in the morning, adjustments of dealer "delta hedge" positions knocked spot prices down to $380 an ounce, a popular option strike price.
"Generally, what happens is we'll gravitate to one of the strikes, every $5," said a gold trader. "We got down to $380 for like 20 minutes of trade selling. Traders got caught short and once we got back to the $383 level there was accelerated short covering all the way back to $385."
December gold settled up $3.60 at $387.00 an ounce, rising almost $8 from the day's $380.30 low to $388.20 and ending a 2-day correction from last week's rally.
Spot gold closed at $386.40/6.90, up from $382.50/3.25 late Tuesday. London bullion dealers fixed the afternoon reference price at $385.40.
The Federal Reserve's continued easy stand on interest rates was also mildly supportive. The central bank on Tuesday left short-term interest rates at 45-year lows to ensure that the U.S. economy continues to recover and the rate of inflation does not drop too low.
Super cheap U.S. deposits have contributed to the dollar's decline this year and helped zero-yield gold rise to 7-year highs in September. December gold came within $2 of that $394.80 high on Friday after a $23 rally last week.
Low rates have eliminated the contango that producers and speculators used to be able to earn by selling gold short in forward markets. But the bond market has already pushed up yields as worries about an inflation pick-up flourish.
Though gold is seen as an inflation hedge, one dealer said the turn around in the economy has got to undermine gold's safe-haven allure in the longer term.
"If anything, higher interest rates are bad for gold because it brings back hedging," he said. "There was so much (producer) buying in the last several quarters that if all of a sudden it ended these funds may turn on the market, their safety net being gone."
The euro was barely firmer at $1.1672/74 in the afternoon, after modest gains fed gold's move up at the COMEX open.
Newmont Mining Corp. , the world's largest gold company, said Wednesday its third-quarter profit rose more than fivefold as gold prices increased. Its stock rose to six-year highs, dragging along the XAU Index of gold and silver mining shares .
Caesar Bryan, who manages the Gabelli Gold Fund, said the market expects gold bullion prices to rise even more, as gold share indices have sharply outperformed bullion.
December silver rose 4.5 cents to $5.142 an ounce after tumbling 9.5 cents Tuesday. It touched $5.19 and $5.07.
Spot silver was last quoted at $5.12/14, up from $5.08/10. The fix was $5.15 an ounce.
NYMEX January platinum rose $9.50 to $757.40 an ounce, 10 cents off a new contract high. Spot platinum fetched $753.00/758.00. It hit a 23-year high as the dollar's weakness against the yen promoted Japanese buying, while a strong rand impacted production out of South Africa.
December palladium rose $6.80 to $206.50 an ounce. Spot palladium fetched $200.50/206.50.