Gold rebounded from a six-month low on Monday as bargain hunters resurfaced and jewellers in China returned to the physical market after the Lunar New Year holiday, but a firm U.S. dollar was likely to limit the upside.
Gold has been under pressure from technical selling and gains in the U.S. 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 $5.18 an ounce to $1,614.24 by 0333 GMT after falling to around $1,598 on Friday, its weakest since August. Friday's loss marked bullion's biggest one-day drop since December.
In Hong Kong, premiums for gold bars rose to as high as $1.70 an ounce to the spot London prices from $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 its key ally, China, that 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.
Leung saw support for the metal at $1,600, which if breached could take it down to $1,580.
Hedge funds and some big speculators slashed their bullish bets on U.S. commodities, taking aim particularly at gold which has lost some of its lustre this year, trade data released on Friday showed.
U.S. gold for April delivery was at $1,614.80 an ounce, up $5.30.
In other markets, Japanese shares rallied and the yen fell on Monday after Tokyo escaped direct criticism from its G20 peers on its aggressive reflationary plans that have weakened the currency.
The euro was little changed at $1.3351, having found good support near $1.3310 on Friday. The low also represented the 38.2 percent retracement level of its November-February rally, and a weaker euro makes dollar-priced gold more expensive.
"The technical profile remains bearish. If prices are unable to regain $1,640 the market would target $1,525-$1,550. The RSI is down at 30.1, on the threshold of oversold and it's lowest in a year," said ANZ in a report.
"The current spell of weakness adds to the risks that we may undershoot our Q1 forecast of $1,730, especially if physical buyers hold back on expectations of further falls."
A raft of business surveys this week will be combed over 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.