Gold rebounded from a six-month low on Monday as bargain hunters resurfaced and buyers in China returned to the physical market after the Lunar New Year holiday, but a firm US dollar was likely to limit the upside.
Gold has been under pressure from technical selling and gains in the US currency after the euro slipped from a 15-month high struck in early February on renewed worries about the health of the euro zone economy.
Gold rose half a percent to US$1,616.35 by 0728 GMT after falling to around US$1,598 on Friday, its weakest since August. Friday's loss marked bullion's biggest one-day drop since December.
"There is a fair amount of buying because spot prices fell a lot during the holiday," said Peter Tse, director at ScotiaMocatta, adding the buying frenzy would calm down in coming days.
Spot contract for gold of 9999 purity on the Shanghai Gold Exchange dropped to CNY326.40 a gram, its lowest in nearly seven months, tracking losses in global market prices over the week-long holiday. Volume exceeded 22 tonnes, marking a record high.
In Hong Kong, premiums for gold bars rose to as high as US$1.70 an ounce to the spot London prices from US$1.50 last week, reflecting a surge in buying interest from jewellers, said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.
But he doubted whether the buying interest would last.
"The strong dollar is the major point. Sentiment is not bullish for the time being, even though we see there's tension in North Korea," said Leung, referring to a lack of safe-haven buying normally associated with geopolitical tensions.
North Korea has told key ally China it is prepared to stage one or even two more nuclear tests this year in an effort to force the United States into diplomatic talks with Pyongyang, said a source with direct knowledge of the message.
The dollar index was headed for a second day of gains, holding near a one-month high hit late last week. A stronger greenback makes dollar-priced commodities costlier for buyers holding other currencies. Leung saw support for the metal at US$1,600, which if breached could take it down to US$1,580.
Hedge funds and some big speculators slashed their bullish bets on US commodities, taking aim particularly at gold which has lost some of its lustre this year, data released on Friday showed.
US gold for April delivery inched up 0.4 percent to US$1,616.40.
A raft of business surveys this week will be studied for confirmation of hopes that a dire fourth quarter of 2012 marked the cyclical trough for the world economy.
Major powers plan to offer to ease sanctions barring trade in gold and other precious metals with Iran in return for Iranian steps to shut down the nation's newly expanded Fordow uranium enrichment plant, Western officials said on Friday.