Gold steadied on Tuesday as U.S. stocks bounced, allaying earlier market jitters that had pressured European equities and boosted interest in the precious metal as a haven from risk.
U.S. stocks, which were closed on Monday for the Presidents' Day holiday, opened higher as cautious investors looked for bargains. That depressed interest in gold as an alternative asset, pulling prices from an earlier high of $1,216.80.
Spot gold was at $1,203.90 an ounce, down from $1,209.30 late on Monday, when it shed 2.3 percent, its biggest one-day loss since mid-July.
Gold hit a one-year high of $1,260.60 last week as worries over the global economy prompted heavy selling of cyclical assets, such as stocks and some commodities. However, its rise has been curbed by uncertainty over U.S. monetary policy.
"All the major financial drivers have been in concert to help this rise happen - the Fed futures curve, the dollar weakening a bit, and equity markets being much weaker than our expectations," Deutsche Bank analyst Michael Hsueh said.
"In order for us to think that this is going to change into a more meaningful bull market, you would have to believe that the Fed is going to come out with an explicit reversal of their indicated direction, and to go into some kind of easing measures."
Heightened stock market volatility and fears that a slowdown in China could spill into the wider markets have led investors to cut the number of interest rate increases they expect from the U.S. Federal Reserve this year.
A correction lower in gold prices had been expected after they rose quickly over a short period of time. The metal rallied $200 to last week's peak from its January lows, with last week being its best since 2011.
Goldman Sachs's recommendation to short gold, prompted by the bank's belief that the recent fear-induced rally has been overdone, fed into a more cautious sentiment for the metal.
"Fears around China, oil and negative interest rates have likely been overstated in the gold price and other financial markets," it said in a Monday-dated note.
U.S. gold futures for April delivery settled down at $1208.20, and were last 2.84percent from where they stood late on Friday at $1,209.90. Most U.S. gold trading was closed on Monday.
Silver futures were down at $15.27 an ounce, while platinum was down 2.7 percent at $932.10 and palladium was down 0.7 percent at $508.