Gold rose to settle about $1,421 per ounce on Monday, supported by strong physical buying after last week hitting a two-year low, but investors reduced holdings of bullion in the top exchange-traded fund to the lowest in nearly three years.
The technical outlook for gold, which is down more than 15 percent this year, has yet to improve despite the physical buying in Asia and elsewhere.
Spot gold rose more than 2 percent to a session-high of $1,438.66 per ounce, more than $100 higher than a two-year low of $1,321 hit on April 16. It had trimmed those gains to $1,425 per ounce, still up 1.6 percent.
Gold posted its biggest-ever daily loss in dollar terms last Monday, shocking investors who have used gold as protection against inflation and other market risks.
But while investors fled the market, the price fall has released years of pent-up retail demand in the past week. Parents buying dowries, casual shoppers and tourists have snapped up bars, coins, nuggets and jewellery.
"Physical demand is giving the price a psychological boost, but don't think that could make up for the 65-tonne outflows from ETFs last week," Saxo Bank senior manager Ole Hansen said.
"The market is obviously looking for someone to show an interest to buy at these levels but it's quite a traditional set-up that we have a sell-off and then tentative recoveries the following days."
The U.S. Mint reported sales of gold coins to the public of 167,500 ounces so far in April, the highest level since May 2010, Barclays said in a note to clients.
"This highlights the dichotomy that has developed between retail and institutional investors," the bank said.
Analysts said they see the gold price gains as short-lived, however, as inflation, a key price driver, shows signs of easing in big economies.
Investors say it is likely that the U.S. Federal Reserve could soon end its bond-buying programme, which could ease inflationary pressure.
"Sure, the market is vulnerable to intense short covering ... while many physical players see these prices as very attractive indeed and will chase price dips," VTB analyst Andrey Kryuchenkov said. "However, we still believe the market went through a fundamental shift and that a sustained rebound ...is very unlikely."
Kryuchenkov said persistent physical interest is needed to support the metal at a time when investors prefer to stay away from the market.
Gold prices thrive in a high-inflation, low-interest rate environment, because this reduces the opportunity cost of holding a metal that pays no yield.
It had rallied to an 11-month high in October last year after the Fed announced its third round of aggressive economic stimulus, raising fears the central bank's money-printing to buy assets would stoke inflation.
U.S. gold futures hit an intraday high of $1,438.80 an ounce on Monday from the previous close of $1,395.60. The June delivery settled $25.60 higher at $1,421.20 per ounce.
Holdings of the largest gold-backed exchange-traded-fund, New York's SPDR Gold Trust, dropped 0.88 percent on Friday to their lowest level since March 2010.
Outflows from exchange-traded funds could indicate that investors are parking their money in assets other than gold, but last week's trading data from the United States also showed that funds had injected new money into gold futures.
Hedge funds and money managers raised their net longs in gold futures and options in the week to April 16, a report by Commodity Futures Trading Commission (CFTC) showed on Friday, as new money entered the market at lower prices.
"Given the speed and magnitude of the price decline on Friday and Monday (of last week), which is captured within these data, it would appear any positions of size that were instigated were quickly closed, whether it was long liquidation followed by fresh longs at lower levels or fresh shorts covered subsequently," Barclays said in a note to clients.
Gold prices have come under pressure in part due to a plan by Cyprus, unveiled this month, to sell excess gold reserves to raise around 400 million euros ($523 million), which led to speculation that other indebted euro zone countries might follow suit.
In other markets, the dollar strengthened towards the yen and the euro, while shares rose after the G20 accepted Japan's bold stimulus policies, helping to counter the gloom over the global growth outlook.