Gold inched up on Tuesday as the euro held on to gains on expectations the European Central Bank will refrain from a rate cut this week, and with robust physical demand in Asia underpinning prices.
Economists expect the ECB to keep rates unchanged at a meeting on Thursday, supporting the single currency, while the dollar index edged down, making greenback-priced commodities more affordable for buyers holding other currencies.
Asia's physical market has picked up so far this year, with buyers tempted by weaker prices and on demand ahead of the Lunar New Year, traders said.
The trading volume on the Shanghai Gold Exchange's 9999 physical contract shot through the roof on Monday, hitting a record of 19,504.8 kilograms, after double-counting transactions in both directions.
"Physical demand is very strong," said a Beijing-based trader. "It's a combination of the attraction of lower prices as well as pre-holiday demand."
But such appetite could waver if prices recover towards $1,700, he added.
"A lot of people who bought into a rally last year got their fingers burned."
Spot gold had inched up 0.2 percent to $1,649.86 an ounce by 0321 GMT.
US gold also gained 0.2 percent higher, to $1,650.30.
Technical analysis suggested that spot gold could edge higher to $1,665 an ounce, and a previous target at $1,625.79 has been temporarily aborted, said Reuters market analyst Wang
But prices remained under pressure from worries over the duration of the US Federal Reserve's bond purchasing programme, with central bank officials becoming increasingly concerned about the side effects of such stimulus measures.
Gold is likely to stay on the backfoot ahead of clearer signals on the global economy, analysts said.
"In the short-term gold lacks momentum to push higher," said Chen Min, an analyst at Jinrui Futures in the southern Chinese city of Shenzhen.
"If we hear anything from the ECB suggesting a worsening outlook for the region's economy or future rate cuts, it will weigh on the euro and consequently weigh on gold prices."
Holdings of the SPDR Gold Trust, the world's biggest gold-backed exchange-traded fund, fell about two tonnes to 1,340.74 tonnes on Jan. 7, down about 10 tonnes, or 0.7 percent, from the end of 2012.
South Africa's Harmony Gold, the country's third-largest gold producer, said its Kusasalethu mine remained closed and could be shut permanently with the loss of around 6,000 jobs after managers received death threats and police were shot at.
Spot palladium inched down 0.1 percent to $667.07, off a more than one-month low of $661.97 hit in the previous session.