The metal reached a near three-week high after Fed Chairman Ben Bernanke said last week that a highly accommodative policy was needed for the near future, which supports a low interest-rate environment that increases gold's attractiveness.
But expectations remained in place that the Fed will start slowing the pace of its $85 billion of monthly bond purchases by the end of the year.
"It appears that gold is benefiting from signs that support Bernanke's attempt to calm market fears [like weak U.S. economic data]," Deutsche Bank analyst Michael Lewis said. "But I think the metal is likely to remain a bit vulnerable in a period of uncertainty before the Fed actually embarks on the stimulus exit."
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Spot gold, initially under pressure from a strong dollar, dropped 0.2 percent to $1,282 an ounce after advancing nearly 5 percent last week, the most since October 2011.
U.S. gold futures for August delivery settled $5.90 higher at $1,283.50 an ounce.
The dollar trimmed earlier gains after retail sales rose less than expected in June at 0.4 percent, adding to signs of a slowdown in economic growth, but it managed to remain positive.
The yield on the benchmark 10-year Treasury dropped below 2.6 percent following the data.
As gold bears no interest, a fall in returns from U.S. bonds is seen as positive for the metal.
The market will now be looking to Bernanke's testimony before Congress on Wednesday and Thursday.
"The main focus is Bernanke's testimony to the Congress, and that should really give us more guidance to whether tapering will start in September or December," Danske Bank analyst Christin Tuxen said. "Gold will be very sensitive to what happens to the euro/dollar after that and to Treasury yields as well."
Short Lived Rebound
Analysts, however, said they did not expect gold's rebound to last because of strength in the dollar, an eventual tapering of the Fed stimulus and weak physical demand during the summer lull.
"Our economists continue to expect the Federal Open Market Committee to taper asset purchases at the September meeting and conclude purchases in March 2014," Barclays wrote in a note. "Given ... [the] seasonally weak period for demand, we believe the recent rally [in gold] is likely to be short-lived."
Investor sentiment remained guarded. Holdings of the world's largest gold-backed ETF SPDR Gold Trust posted a 2.6 percent loss last week, the biggest weekly loss since April. The fund has seen outflows of over 13 million ounces, or about $17 billion at current prices, this year.