Gold inched up on Monday to reverse losses from the previous session, bolstered by expectations for aggressive monetary easing from the Bank of Japan.
The central bank may consider making an open-ended commitment to buy assets until a 2-percent inflation target is in sight at a policy meeting ending on Tuesday, driving the yen to a 2-1/2-year low and pushing Tokyo's benchmark gold to match a record of 4,911 yen a gram.
Monetary stimulus from central banks helped gold extend its bull run into a twelfth year in 2012, with investors fleeing to hard assets on worries that rampant cash printing would prompt currency debasement.
"There is attention on the Bank of Japan, which is really being pressured to embark on some very precious metals-friendly policy," said a Hong Kong-based trader.
Decent physical buying interest in Asia is also supporting prices, he added.
The upcoming Lunar New Year festivities in Asian countries including China, which is vying with India to become the world's top gold consumer, has pushed up physical gold demand since the start of the year. That is likely continue for the next couple of weeks or so, with the Lunar New Year falling on February 10.
Spot gold had risen 0.4 percent to US$1,689.54 an ounce by 0334 GMT, after gaining 1.3 percent last week.
US gold inched up 0.2 percent to US$1,689.60.
Technical analysis suggested spot gold is still targeting US$1,706 an ounce during the day, as indicated by its wave pattern and a Fibonacci projection analysis, said Reuters market analyst Wang Tao.
Japan has been a net gold seller in the past few years, but more aggressive monetary policy could revive the long-dormant interest in buying the yellow metal, analysts said.
"If you start to see inflationary pressure and negative interest rates in Japan, people will be thinking about how to protect their savings," said Nick Trevethan, senior commodity strategist at ANZ in Singapore, adding that the lack of suitable investment products in the market is likely to drive investors back to gold.
Trading interest in precious metals picked up in the week to January 15, with open interest and net long positions rising across precious metals, according to data from the US Commodity Futures Trading Commission.
Signs of progress in the US debt ceiling talks also helped underpin prices.
Investors will be closely watching the US Federal Reserve's policy meeting next week for clues on the central bank's attitude towards its monetary stimulus. Any indication of withdrawal of such policy would deal a blow to bullion.
"There is decent appetite for buying on dips, but I don't know how long it will last because the Fed is coming up and people will get a little skittish about being over-exposed ahead of the FOMC (Federal Open Market Committee) meeting," said the Hong Kong-based trader.