Gold edged up on Wednesday, but analysts expect the breakout in Wall Street stocks to new highs and data showing an improving U.S. economy to pressure the precious metal's safe-haven appeal.
News of another gold purchase by South Korea's central bank last month and hopes that outflow in gold-backed exchange-traded fund will peter out soon also supported bullion prices.
The U.S. equities market resumed its climb into uncharted territory, with the Dow setting intraday record for a second session as hiring by U.S. companies rose strongly last month.
"You are going to get less people interested in defensive plays like the precious metals. People are more into buying equities in a risk-on type environment," said Phillip Streible, senior commodities broker at futures brokerage RJ O'Brien.
Bullion prices are down nearly 6 percent so far this year and down about 18 percent from a record high of $1,920.30 an ounce hit in September 2011.
The metal reversed early losses and appeared to find support near Friday's low at around $1,565. Worries among some investors that U.S. equities have rallied too fast and too far provided support to gold, traders said.
Bullion rebounded into the headwind of a strong dollar, which benefited from a falling euro on speculation about future interest-rate cuts a day before a European Central Bank policy-setting meeting.
The ECB, the Bank of England and the Bank of Japan are all expected to stick to ultra-easy monetary policy at meetings on Thursday, following assurances by Federal Reserve officials that their stimulus program remains in place.
South Korea Buys Gold
South Korea's central bank said on Wednesday it bought 20 tonnes of gold in February in the fifth purchase of the metal in less than two years, taking total holdings to 104.4 tonnes.
But continued outflows from gold-backed exchange-traded funds underscored the sober sentiment for the precious metal and overshadowed physical purchases by Asian consumers.
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SPDR Gold Trust, the world's biggest gold ETF, said its holdings dropped on Tuesday in the eleventh session of straight declines to a 16-month low of 1,244.855 tonnes, signalling investor selling.
"South Korea's gold purchases - and probably those of other central banks - were only able to offset February's outflows from gold ETFs in part," Commerzbank said in a note. "The outflows are continuing up to the current edge, yesterday seeing further outflows of 8.5 tonnes."
"For the first time since mid-September, holdings of gold ETFs have fallen to below 2,500 tonnes again. For as long as this trend persists, the gold price is hardly likely to achieve any significant recovery."
In India, the biggest consumer of the precious metal, gold importers were awaiting bigger price falls in the metal before stepping up purchases as they remained wary of volatility in the rupee.