Gold rose for a second day on Tuesday, rebounding from last week's 5-1/2-year low, as a retreat in the dollar prompted investors to cover short positions ahead of a European Central Bank (ECB) meeting and U.S. payrolls data this week.
The dollar slid from a 7-1/2-month high versus the euro, with traders judging that a significant amount of further monetary easing had already been priced into the single currency ahead of Thursday's ECB meeting.
was up 0.4 percent at $1,069.11 an ounce, extending a bounce from its lowest since February 2010 last week at $1,052.46. U.S. gold futures for February delivery settled down 0.2 percent at $1,063.50 an ounce.
Gold posted its biggest monthly drop in 2-1/2 years in November as investors positioned for a U.S. rate hike this month. Data on Monday showed that hedge funds and money managers raised their net short position in COMEX gold to a record in the week to Nov. 24.
"Gold is still following the dollar ahead of the Fed decision," MKS' head of trading Afshin Nabavi said. "It ran out of breath on Friday around $1,051-ish, but having said that we have to break above $1,095 for some fresh blood."
In the physical market, there were signs of robust demand. The U.S. Mint's sales of American Eagle coins rebounded in November from the previous month's slump.
Premiums on the Shanghai Gold Exchange, an indicator of buying strength at top consumer China, were at a healthy $5-$6 an ounce.
"Gold has the potential for further short covering to take prices higher, especially if emerging market physical demand stays strong," HSBC said in a note.
"The ECB rate announcement on Thursday 3 December could impact the EUR if the bank further loosens policy ... (while) gold could weaken if the jobs figure is significantly above mean expectations."
Georgette Boele, FX and commodity strategist at ABN Amro, said in a note the bank expects investors to continue to liquidate positions.
"We expect gold prices to break below $1,000 per ounce in the coming months," she said.
"Silver prices could drop to $13.50 per ounce while platinum and palladium prices could drop below $800 per ounce and $500 per ounce, respectively."