Gold rebounded to settle at $1,395 an ounce on Friday as strong buying of coins and bars continued, primarily in Asia, but prices were still on course for a fourth week of losses after a brutal sell-off.
Analysts said more weakness could be on the cards, including further outflows from exchange-traded funds due to nagging worries about central bank sales and the possibility of economic recovery, which would reduce the need for further monetary stimulus.
Gold last rose 0.5 percent to $1,398 per ounce. The metal hit a two-year low of $1,321.35 on Tuesday and was still set for a weekly loss of 5.1 percent.
(Read More: Gold 'Risks Are Overblown': Godfrey)
U.S. gold futures ended $3.10 higher at $1,395.60 per ounce.
"We suspect there could be some short-covering today," HSBC analyst Howard Wen said.
(Read More: Gold Slump Expected to Fuel China's Acquisition Hunt)
Short-covering occurs when traders are forced to buy an asset they had agreed to sell at a future date in the expectation its price would fall.
"We are also seeing a huge amount of interest in gold coins and bars especially out of Asia, which should continue to be quite positive and provide some support."
Gold investors were awaiting a release of U.S. CFTC data that will provide a clearer picture of speculative activity in the week to Tuesday 16 April.
The drop in prices has ignited a spate of buying in gold coins, nuggets and bars, sending premiums for gold bars to multi-month highs in Asia.
Dealers said they saw heavy volumes of physical buying, even though prices had gained more than $100 since hitting a two-year trough earlier this week. Buying improved in top consumer India after a lacklustre start.
"In retail physical markets there have been exponential increases in premiums globally," MKS Capital said in a note.
"High premiums mean supply is drying up, and it will show up next in the paper gold markets, which could squeeze some week spec shorts out in the near term."
Gold's biggest ever daily fall in dollar terms on Monday caught gold bulls, speculators and veteran investors by surprise, and long-term holders were still exiting positions.
Holdings of the SPDR Gold Trust, the world's largest gold-backed ETF, are at their lowest in three years after falling by a further 0.2 percent to 1,133 tons on Thursday.
Gold has ignored tension in the Korean peninsula, and investors are increasingly convinced the U.S. Federal Reserve will look to end its bullion-friendly bond-buying program by the end of 2013 or beginning of 2014.
Cyprus' plan to sell excess gold reserves to raise around 400 million euros ($523 million) also led to speculation other indebted euro zone countries could follow suit.
In wider markets, European and U.S. shares and oil prices rebounded on Friday after a sell-off this week that was triggered by signs of sluggish global growth.
Other precious metals were mixed in trade, with silver down 0.6 percent to $23 per ounceand palladium 0.9 percent firmer at $673. Platinum reversed earlier gains to trade down 0.3 percent at $1,419 per ounce.