Jan 31 - Premiums for gold bars were at their strongest level since at least 2004 on Monday on tight supply, short covering before the festive season in India and China as well as physical buying driven by the deadly protests in Egypt, dealers said on Monday.

Employee shows a 1kg gold bar in Chinese gold shop

Gold bars were quoted at a premium of $4 an ounce to the spot London prices in Hong Kong, its highest level since Reuters began compiling the data in 2004, up from $3 last week.

Physical dealers have seen a pick up in demand in recent weeks ahead of the Lunar New Year later this week and the wedding season in India in February, although any increase in cash gold prices also triggered selling from speculators.

"There's a lot of interest from India, but it's just that we can't meet their demand. Everybody is snatching the available stocks," said a dealer in Singapore. "We are seeing some light selling from Thailand, but there's also buying at lower levels."

Spot gold fell $4.45 to $1,333.85 an ounce on Monday, having posted its biggest gain in eight weeks on Friday on buying related to fears the deadly chaos in Egypt could spread throughout the Middle East.

Gold should build on last year's stellar gains in 2011 to hit record highs, boosted by low interest rates, dollar weakness and lingering worry over growth in major economies, a Reuters poll showed.

Premiums for gold bars in Singapore remained firm at $3 an ounce, also their highest since at least 2004, partly driven by demand from top consumer India ahead of the wedding season, when parents give gold jewellery to their daughters.

India's January gold imports are seen rising on softer prices and as food inflation boosts farm incomes, fuelling demand for the precious metal, a poll showed.

"My clients offered to buy gold bars at $5 premium, but I have no gold. Nowadays, gold is booked and sold even before they leave the refinery," said another dealer in Singapore.

"There's some selling back in the gold market, but the premiums are still high. I do see light selling by the Thais too, but one consumer just called to sell me back the gold in transit."

WEEK AHEAD

Looking ahead, dealers expected steady purchases from India before the wedding season, while some consumers in Hong Kong could be stocking while waiting for the market in China to reopen after the Lunar New Year.

"I think people will keep on hand, just in case the problems in Egypt can't be solved, and then gold prices will go up," said a dealer in Hong Kong.

Egyptian protesters were camped out in central Cairo on Monday and vowed to stay until they had toppled President Hosni Mubarak, whose fate appeared to hang on the military as pressure mounted from the street and abroad.

By Lewa Pardomuan
(Editing by Himani Sarkar)