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 as robust physical demand in Asia underpinned 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 last week's big drop in prices -- when prices retreated to as low as 1,626 per ounce -- and on demand ahead of the Lunar New Year, traders said.
The trading volume on the Shanghai Gold Exchange's 99.99 gold physical contract shot through the roof on Monday, hitting a record of 19,504.8 kilograms, after double-counting transactions in both directions.
Spot gold had inched up $1.56 to $1,648.20 an ounce by 0742 GMT.
"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.
U.S. gold gained 0.1 percent to $1,648.60.
Shanghai's 99.99 gold traded at 331.58 yuan a gram, or $1,658 an ounce - a $10 premium over spot prices, compared to single-digit premium most of last year.
Technical analysis suggested that spot gold could edge higher to $1,665 an ounce, and a previous target of $1,625.79 has been temporarily aborted, said Reuters market analyst Wang Tao.
But prices faced headwinds from worries over the duration of the U.S. 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 back foot 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 January 7, down about 10 tonnes, or 0.7 percent, from the end of 2012.
In industry news, the world's top gold producer, Barrick Gold Corp , said it is no longer in talks with state-owned China National Gold Corp to sell it a stake in its majority-owned, London-listed gold producer African Barrick Gold.
Spot palladium inched down 0.4 percent to $665.33, off a more than one-month low of $661.97 hit in the previous session.