Cyprus's parliament was set to reject the divisive tax on Tuesday, pushing the island closer to a debt default and banking collapse
Gold hovered near a 2-1/2-week high on Tuesday, as nervousness around an upcoming vote on a levy on bank deposits in Cyprus supported safe haven interest in gold, but investors were sceptical about such support being sustained.
Cyprus's parliament was set to reject the divisive tax on Tuesday, pushing the island closer to a debt default and banking collapse, despite euro zone ministers agreeing to flexibility in exempting depositors with less than 100,000 euros from the levy.
The radical bailout package announced over the weekend has not changed general expectations for a global economic recovery among investors, whose interest in safe havens such as gold remains lukewarm.
SPDR Gold Trust, the world's biggest gold-backed exchange-traded fund, posted its biggest daily decline in nearly a month on Monday despite a gain of 0.8 percent in gold prices.
"There are worries, but the extent of such worries is limited, reflected in the fact that some investors panicked and others used the opportunity to pick up [risky assets]," said Jiang Shu, an analyst at China's Industrial Bank.
"After all, the US economy is doing much better than 2009 and 2010, which helped blunt the blow from Cyprus."
Spot gold was little changed at US$1,603.86 an ounce by 0730 GMT, trading in a US$4 range below a 2-1/2-week high of US$1,610.81 hit in the previous session.
US gold traded nearly flat at $1,603.10.
Technical analysis suggested spot gold faces resistance at US$1,611 an ounce and may either hover below this level or retrace to US$1,593, Reuters market analyst Wang Tao said.
In a sign of ebbing fear, Asian shares rebounded and the euro pulled back from a three-month low against the dollar hit on Monday.
The U.S. Senate inched closer on Monday to passage of a bill to fund federal agencies through Sept. 30 and avoid a government shutdown when existing funds run out at the end of March, alleviating fears that spending cuts would derail the recovery.
Investors will be watching the Federal Reserve's policy meeting on Tuesday and Wednesday, expecting little change on the central bank's monetary policy but possibly a more positive tone in assessment of the economy.
In Asia's physical market, buying slowed as prices moved higher from this month's low at US$1,560, dealers said.
Spot platinum edged down 0.2 percent to US$1,572.74, off a two-week low of US$1,567.75 an ounce hit in the previous session. Spot palladium bounced off a 1-1/2-week low of US$750.22 and traded at US$757.72.