Spot gold prices recovered nearly $4 from Thursday's sell-off in Asian and early European trade Friday, touching $669 just ahead of the Wall Street open.

After a flurry of central bank votes on Weds and Thurs, the gold market watched for US producer price and retail sales data - due at 08:30 New York time – to judge the inflationary outlook from here. (Why do interest rates and inflation matter to gold? Find out here...)

"Under the current fundamental picture, the size of the sell-off [at 2.2%] was perhaps a little more then expected for just one session," says Brandon Lloyd for Mitsui today.

Gold mining output in South Africa, the world's largest producer, fell 10.8% in March from the same month last year, said the statistics agency in Jo'berg this morning.

Production of non-gold minerals fell just 0.7%. South Africa's gold output has halved over the last decade. (Read more about the gold mining outlook here...)

"[Thursday's plunge] shows what can happen when short-term sentiment turns. [But] when this is looked at from the macro perspective however, a decent clean out was overdue.

"After all, to ensure a rally is healthy and has a bit of substance behind it, a shake out along the way is definitely required!"

In the stock market, London's FTSE100 recovered Friday's opening by lunchtime after continuing the sharp drop seen Thursday.

Dow and S&P futures also pointed higher after the US indices dropped 147 points and 1.4% respectively by last night's close.

Picking up where Wall Street had left off, the Nikkei in Tokyo lost more than 1% after brokers downgraded Casio Computers on a poor forecast.

Tocom gold futures for April '08 delivery also played catch up, dropping "limit down" – the maximum allowed daily loss, equaling a 2.3% loss – to end below ¥2,586 per gram.

"There's some physical [gold] buying in the Asian region," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, earlier to Reuters.

"The market has dropped so much and it attracts some buying interest."

Strong physical gold demand in Asia had been missing for several weeks, according to local dealers.

Jewelers sat out gold's rally to $690 and above, hoping for lower prices before re-stocking.

Now more than $30 down from Monday, those lower prices have finally shown up in stark contrast to the quarter-century highs seen this time last year. (See the size of gold's disappointment here...)

The Euro, which also turned higher versus the Dollar in 2001, has dropped 1.1% for the week so far.

It's fallen despite hints of higher Euro interest rates in June from Jean-Claude Trichet – head of the European Central Bank – after Thursday's "no change" decision.

The Euro price of gold recovered slightly, but remained €3.50 off the €500 per ounce mark.

Ahead of Friday's opening in London, the Pound Sterling traded at $1.9775 – down 1.6% from its recent top even after the Bank of England hiked to 5.5% yesterday just as expected.

The Pound Sterling price of gold also lagged its key level of £340 per ounce, trading 2.3% lower from Monday's opening.

"Gold's failure to break through the key $700 level earlier in the week also contributed to last night's falls," reckons Investec Australia today, "with a certain amount of despondency materializing."

Despondency in the gold market is usually taken to signal bullishness in risk capital markets.

So why is gold now falling alongside stocks once again – the third such plunge in 2007 so far?

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