Gold rose nearly 2 percent to settle at $1,391 per ounce on Thursday as the dollar remained under pressure after falling U.S. weekly jobless claims and as a senior Federal Reserve official said the central bank is in no hurry to start winding down its economic stimulus.
The president of the Federal Reserve Bank of St. Louis James Bullard said he did not think the Fed was "that close" to starting the process of winding down its support after Wednesday's comments by chairman Ben Bernanke hinted at it.
Spot gold was last up 1.6 percent to about $1,390 an ounce, having lost more than one percent on Wednesday after Fed Chairman Ben Bernanke said a decision to reduce the central bank's bond-buying program could be taken in the 'next few meetings.
U.S. gold futures ended the day $24.40 higher at $1,391.80 an ounce.
"The market is still digesting Bernanke's comments, which took everybody by surprise ... but today Bullard went a little bit in the other direction saying that tightening wouldn't come that quickly and I think that is lending support," Danske Bank analyst Christin Tuxen said.
The dollar index last fell 0.7 percent against a basket of currencies, mostly due to a two-week high in the yen and ignoring data showing the number of Americans filing new claims for unemployment benefits fell more than expected last week
Any sign of improvement in the U.S. jobs sector will likely be closely watched as this may spur speculation that the Fed may scale back its stimulus in September, analysts said.
"It seems the market is now squarely focusing on the September 17-18 FOMC meeting for the Fed to make its move," ING said in a note.
Gold also gained support from lower European shares, which fell on concerns over an end to quantitative easing in the United States and weak economic data from China and Europe.
A euro zone purchasing managers' index showed that while the slump in business activity eased slightly in May, it pointed to a further contraction in the second quarter. The flash HSBC purchasing managers' survey showed Chinese factory activity shrank in May for the first time in seven months.
"China's drop in factory activity is showing that the economy is still more fragile than we would have hoped for and that weighed down on stock markets and may be read as helping gold as a risk-off asset," Tuxen said.
As a gauge of investment, holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.3 percent to 1,020.07 tons on Wednesday, the lowest in more than four years.
Physical gold demand in Asia was seen normalizing as jewellers had largely replenished their stocks and retail investors satisfied their needs following record buying after the metal fell to a more than two-year low of $1,321.35 in mid-April, analysts said.