Spot gold prices sank at the US opening, before turning sharply higher to peak at the London PM Fix of $655 per ounce.

"The market has pretty well recovered," reckons Frederic Panizzutti, metals analyst at MKS Finance.

"Today what really prevails is the positive sentiment for gold and the fact that gold has broken $650 and managed to remain above that level.

"That has opened up a new range between $650 and $680, probably paving the way for a move higher."

Despite volatile action on the world currency markets, gold prices in Euros, Sterling and the Japanese Yen matched the main moves in Dollar terms.

At the PM Fix, gold was priced at £336.82 and €492.62 – the highest prices since Tuesday last week.

News from the broader gold sector continues to support further price appreciation for the physical metal, too.

Gold Corp. secured approval from its shareholders for the purchase of 3 smaller gold mining firms on Friday. Rumor has it that Barrick Gold could bid $20 billion or more for the sector's No.2 firm, Newmont Mining, too.

But mergers and acquisitions always seem to reduce total gold output.

Last year M&A in the sector hit an all-time record of $16 billion according to Merrill Lynch.

Consolidation did nothing to increase mining production. Indeed, global production fell by 1.5% according to the GFMS consultancy. And as Chris Powell noted for GATA at the weekend, fresh deals now look likely to reduce output further.

Since it swallowed up Homestake and Placer Dome, Barrick mining has cut combined output by 100,000 ounces per year, says Powell.

"In 2000 AngloGold and Ashanti produced a combined 8.98 million ounces of gold," he goes on. "Combined in 2006, AngloGold Ashanti produced 5.6 million ounces and expects 2007 production to be 5.5 million ounces."

And in 2001, Newmont and Normandy produced a combined 7.85 million ounces. "Combined in 2006," says Powell, "Newmont produced 5.9 million ounces and expects 2007 production to be lower."

In short, digging for gold on the stock market does nothing to help gold mining companies dig for the real thing beneath the ground.

For more on what this means for the longer-term price of gold, click here now...

Further supply-side pressure is coming from the world's major central banks, too.

According to the World Gold Council, Russia's reserves rose 2.2% to 403 tonnes in the 3 months to March.

"Russia is not the only buyer," notes the weekly update from Hereaus, the German refining company.

"In the last three months, Belarus has added 6.2 tonnes of gold to its reserves," says the report. "Kazakhstan [added] 7.6 tonnes and Greece 3.8 tonnes.

"On top an unnamed ECB bank added another 14 tonnes in February. Despite these rather encouraging signs, official holdings fell last year to the lowest level since 1948."

The world's central banks, in other words, are short of gold amid the current bull market. Just like the strategic switch by several leading gold mining companies to cover their own short positions in 2006, some central banks are now buying back in – and fast.

For more on why – plus analysis of what's driving the long-term bull market in gold – click here now...