It has since rebounded as traders weigh up the prospect of a later U.S. interest rate hike this year after payrolls data on Friday came in softer than expected, bolstering expectations that hikes would only be gradual.
Spot gold was up 0.2 percent at $1,259.15 an ounce, while U.S. gold futures for December delivery settled to higher 0.7 percent at $1,260.40 an ounce.
"Partly this is a reaction to the rather disappointing payrolls data on Friday, which has forced a readjustment of rate rise expectations," Mitsubishi analyst Jonathan Butler said. "There is also a feeling that the sell-off last week was rather overdone.
"Also of course we have a return of the Chinese physical market from a week-long holiday last week," he said. "The market was crucially lacking that element of physical support that we would normally expect to at least keep a floor under prices."
Hedge funds and money managers cut their net long positions in COMEX gold contracts to four-month lows in the week to Oct. 4, as prices tumbled, U.S. government data showed.
However, the world's largest gold-backed exchange-traded fund, New York-listed SPDR Gold Shares, reported the biggest one-day rise in its holdings since early July on Friday, of 11.3 tonnes.