Gold firmed on Monday, bouncing from a one-week low hit on Friday, supported by physical buying in Asia, but robust US economic data dented bullion's safe-haven appeal.
Automatic spending cuts that kicked off in the United States on Friday, pushing spot gold to its lowest level in more than a week, also continued to weigh.
"The broad theme might be gold-negative, because the spending cuts are probably taking away a bit of the froth on the idea that policymakers are spending out of control and they will keep doing so until the recovery takes hold," said a Hong Kong-based trader.
Investors are waiting to see the impact of the spending cuts, known as the "sequester". Although the $85 billion cuts, a fraction of the US government's total spending of $3.7 trillion, are unlikely to become a huge drag on the economy.
Vigorous US manufacturing data, together with strong auto sales and a rise in consumer sentiment in February, suggested a pickup in economic growth, tempering interest in gold.
Recent weakness in the global market has triggered physical buying interest in Asia, particularly in China, as the spread between onshore prices and international prices widens, cushioning the fall in dollar-priced gold.
The popular gold forward contract on the Shanghai Gold Exchange was trading at 319.9 yuan a gram by 0324 GMT, or $1,599 an ounce, about a $20 premium to spot gold.
"Most likely we will see banks bringing the metal onshore to take advantage of the wide spread," said the Hong Kong-based trader.
Spot gold inched up 0.2 percent to $1,578.01 an ounce, bouncing off a one-week low of $1,564.44 hit last Friday.
U.S. gold was up 0.3 percent at $1,577.60.
Technical analysis suggested spot gold could fall to its Feb. 21 low of $1,554.49, after a brief consolidation, as it is riding on a downward wave (5), said Reuters market analyst Wang Tao.
The exodus of investment from the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, continued. Its holdings fell to a seven-month low of 1,254.885 tonnes on Friday, in a ninth consecutive session of decline.
The overall improving outlook for the global economy has boosted risk appetite and driven investors from gold to higher-yielding assets such as equities.
"The near-term price of gold is not expected to rise much above its current level, so long as the recent bout of improved confidence is sustained and the rally in equity prices is reflective of fundamentals rather than purchasing by over-exuberant market participants," National Australia Bank said in a research note.
Hedge funds and money managers increased their net long positions in gold in the week to Feb. 26 from a more than four-year low hit a week earlier, showing the return of some investment interest.
In contrast to a sharp decline in speculative interest in futures and options over the past month, sales of American Eagle gold coins rose sharply year-on-year in February, and silver coin sales posted their strongest performance for the month since 1986.