* Gold reverses losses but still near two-year low of
* Fed needs to see more from economy before scaling back
* China PMI shrinks for first time in 7 months
(Recasts, updates price)
By A. Ananthalakshmi
SINGAPORE, May 23 (Reuters) - Gold climbed off session lows
on Thursday after weak Chinese factory activity jolted stock
markets in Asia, sending investors back to the precious metal
despite expectations the U.S. Federal Reserve will scale back
its monetary stimulus.
The Nikkei dropped 7.3 percent, its biggest one-day
percentage fall in two years, after a preliminary survey showed
China's factory activity contracting, adding to concerns about a
delayed recovery. MSCI's broadest index of Asia-Pacific shares
outside Japan fell 2.1 percent.
Bullion had earlier fallen after Fed Chairman Ben Bernanke
hinted at reducing an $85 billion bond-buying programme, hurting
the metal's appeal as a hedge against inflation.
Spot gold rose 0.5 percent to $1,375.16 an ounce by
0644 GMT. It hit a low of $1,356.24 earlier in the session, not
far from a two-year trough of $1,321.35 plumbed in April.
But gold could come under more selling pressure as Bernanke
said a decision to adjust the bond-buying program could come in
the "next few meetings" if the economy looked set to maintain
"It does not matter if the tapering off (of the bond buying)
is in this quarter or next or delayed by six months," said
Dominic Schnider, an analyst at UBS Wealth Management.
"If you know it's tapering off anyhow in the next 12 months,
people do not want to be in (gold) anymore."
The precious metal is down nearly a fifth this year as
investors have fled to higher-yielding assets such as stocks.
Holdings in SPDR Gold Trust, the world's largest
gold-backed exchange-traded fund, fell 0.3 percent to 1,020.07
tonnes on Wednesday, the lowest in more than four years.
U.S. gold futures rose 0.49 percent to $1,374.10 an
ounce. Spot silver was up slightly but platinum
and palladium were lower.
The flash HSBC Purchasing Managers' Index in China for May
fell to 49.6, slipping under the 50-point level separating
expansion from contraction, for the first time since October.
The data revived investor worries about whether China can
sustain an economic revival this year, after annual growth
slumped to a 13-year trough in 2012. China's factory output and
investment performance for April released earlier this month had
already underwhelmed markets.
The contraction is an "alarming sign", said UBS' Schnider at
a time when physical gold demand in Asia has been normalising.
Top gold buyer India, which had seen gold imports jump 138
percent in April, is facing a slowdown as the peak wedding
season comes to an end and its central bank imposes new rules to
reduce a deficit.
Precious metals prices 0644 GMT
Metal Last Change Pct chg YTD pct chg Volume
Spot Gold 1375.16 6.62 +0.48 -17.88
Spot Silver 22.25 0.06 +0.27 -26.52
Spot Platinum 1456.99 -8.51 -0.58 -5.08
Spot Palladium 734.47 -9.53 -1.28 6.14
COMEX GOLD JUN3 1374.10 6.70 +0.49 -18.00 33998
COMEX SILVER JUL3 22.21 -0.26 -1.17 -26.53 8302
COMEX gold and silver contracts show the most active months
(Editing by Muralikumar Anantharaman)