Gold rose 1 percent on Thursday as weaker U.S. economic data boosted hopes that the Federal Reserve will maintain its monetary stimulus, allaying fears that the U.S. central bank may stop buying assets soon.
Thursday's economic reports from claims for jobless aid to factory activity and consumer prices pointed to a still tepid recovery, supporting the argument that the Fed should continue its buying of $85 million in bonds per month to stimulate growth.
An increasingly divided Fed on whether it should halt its stimulus program, evidenced by the minutes of the Fed Open Market Committee (FOMC) meeting in January, weighed heavily on gold's inflation-hedge appeal.
Gold tumbled 2.5 percent on Wednesday to its lowest price since July after the FOMC minutes and widespread rumors that a large commodity hedge fund had been forced to liquidate its holdings.
The open interest of COMEX gold futures, however, was down only 0.1 percent on Wednesday, exchange data showed, and traders said it was unlikely that the sell-off was triggered by a troubled fund's forced selling.
Signs of an improving U.S. economy have heavily pressured gold's traditional status as a safe haven against economic uncertainty. The price of gold has dropped almost 10 percent from a high above $1,700 an ounce in early December.
"I am a buyer on dips right now. The sell-off was overdone as we lost almost $100 from just last week," said COMEX gold option floor trader Jonathan Jossen.
Spot gold rose 0.9 percent to $1,576.86 an ounce by 2:20 p.m. EST (1920 GMT), rebounding sharply from a seven-month low of $1,554.49.
U.S. gold futures for April delivery settled up 60 cents at $1,576.50, with trading volume about 15 percent above its 250-day average, preliminary Reuters data showed.
Gold's 14-day relative strength index had briefly fallen to around 18 on in the previous session before a sharp rebound to 26 on Thursday. A market is generally considered oversold when the RSI drops below 30.
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COMEX open interest edged down 532 lots to 446,758 contracts, CME data showed. The data does not support rumors that Wednesday's sell-off in gold and crude oil was sparked by asset liquidation by a distressed fund, traders said.
A spike in gold price volatility also prompted retail investors to reduce their bullish bets on gold.
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, reported an outflow of around 20 tonnes, or 1.5 percent, to about 1,299 tonnes, marking its biggest one-day drop in 18 months on Wednesday.
Among other precious metals, spot silver rose 0.3 percent to $28.61, having hit a six-month low of $28.26 an ounce in the previous session.