Gold bounced back in late trade on Wednesday after falling to a three-month low as the dollar pared gains following a retreat in US Treasury yields. Gold was also helped by short-covering. It rose as high as $652.25 an ounce after falling to $642.90, its weakest since mid-March. Gold was quoted at $651.15/651.65 at 1505 GMT, compared with $648.30/649.80 in New York late on Tuesday.
Traders watched moves in the dollar, which hit an 11-week peak versus the euro earlier in the day after a rally in US Treasury yields boosted its appeal, but pared gains following a drop in those yields after data showing May US retail sales growth was the highest since January 2006.
"The numbers came out, which were actually positive for the dollar and negative for gold, but the market hasn't reacted to them," said David Holmes, director of precious metals sales at Dresdner Kleinwort.
"In fact we have seen some pretty decent-sized bids coming into the market. A little bit of short covering is going on here. Still that doesn't mean to say that the downside risk is removed. We still see some long liquidations." Analysts said gold would remain under pressure so long as fears of global monetary tightening prevailed.
Bullion traditionally is a hedge against inflation, but it can become less attractive to investors in times of rising interest rates as it is zero-yielding.
Rising US interest rates boost the dollar, which also hits gold as it becomes more expensive for holders of other currencies. "As higher interest rates globally suppress inflationary impulses and make emerging-market assets less attractive, gold is likely to remain on the defensive," James Steel, metals analyst at HSBC, said in a daily note.
Gold traders eyed a key technical price level - the 200-day moving average just above $638 - as a fall below that might trigger more selling. "From a longer-term perspective, we would emphasise that the market has not sustained a break below its 55-day moving average since 2003. This is located at $635 and as a consequence we maintain our longer term bullish bias while above here," Karen Jones, analyst at Commerzbank, said in her weekly price report.
In the physical market, a senior official in top gold consumer India said the nation's rising gold imports pointed to a good year after high and volatile prices dampened volumes last year.
When gold prices first began to decline last week, traders noted good interest from physical buyers. The New York gold exchange traded fund (ETF) also saw inflows after falling 7 tonnes earlier in the week, to total 473 tonnes, although that is still some way off its peak holdings of just over 500 tonnes in mid-April.
Silver declined with gold, scoring a one-month low at $12.70. Prices then rose back to $13.10/13.14, against New York's previous $13.06/13.09. Spot platinum fell to $1,280/1,284 an ounce from New York's $1,288/$1,292, while palladium rose $1 to $366/370 an ounce.