Gold prices settled higher on Thursday, partially recovering from a more than 1 percent loss in the previous session, as market participants felt reassured of the possibility of a gradual pullback in the U.S. Federal Reserve's stimulus program.
Fed Chairman Ben Bernanke said during his U.S. Congress and Senate testimony this week that the U.S. central bank still expects to start scaling back bond purchases later in the year, but left open the option of changing that plan if needed.
"Tapering is here and we will be living in a different world at some stage ... but even if we start seeing less easing that doesn't necessarily mean that we'll see an higher interest rates environment," Credit Suisse analyst Karim Cherif said.
"On the contrary, low interest rates will probably continue and that's also why there is a base to how much gold could drop," he added.
Spot gold briefly rallied 1 percent to a session high of $1,288.06 an ounce, as investors found value following a one-percent slide in the previous session, but it pared some gains as the dollar held its ground after strong U.S. jobs data.
(Read More: What Bernanke's testimony means for gold: Pro)
It was last trading at $1,285, up about 0.8 percent. U.S. gold futures for August delivery settled $6.70 higher at $1,284.20 an ounce.
The dollar extended earlier gains after U.S. weekly jobless claims data showed the number of Americans filing new claims for jobless benefits dropped more than expected last week to the lowest level in four months.
The data could reinforce the view that the Federal Reserve will start winding down its massive stimulus program as early as September, but some traders warned that July's labour data are usually heavily distorted by seasonal factors.
Bullion has slipped more than 20 percent this year, losing its safe-haven appeal after the U.S. central bank first signaled it would look to rein in its $85 billion in monthly asset purchases later this year and halt stimulus altogether by mid-2014.
SPDR Holdings Fall
The Fed's three quantitative easing schemes have buoyed prices of gold and other commodities, as they kept interest rates low, which weighed on the dollar, making assets priced in the greenback cheaper for foreign investors.
As a gauge of investor sentiment, holdings of the world's largest gold-backed ETF SPDR Gold Trust fell 1.5 tons to 937.57 tons on Wednesday. The fund has seen outflows of around 370 tons, or about $17 billion at current prices, so far this year.
(Read More: History shows gold could fall another $500)
Gold's recent weakness has attracted buying in the physical sector, keeping premiums for gold bars steady in Singapore at $2.50 to $3 an ounce to spot London prices..
But demand from top consumer India has been muted after the government raised its import duty and stopped consignment imports, cutting imports by 81 percent in June.