Gold regained its footing Wednesday in response to the dollar shedding some of its gains.
Earlier in the day, gold fell after stronger than expected U.S. inflation and retail sales on Wednesday added to expectations of near-term U.S. interest rate rises, driving the dollar to a one-month high.
U.S. Federal Reserve Chair Janet Yellen said on Tuesday that delaying increases in rates could leave the Fed's policymaking committee behind the curve.
Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced. Spot gold initially dropped as the dollar rose, but entered into positive territory later in the morning. Spot gold is currently up 0.23 percent at $1,231.01. U.S. gold futures for April delivery rose $7.70 to settle at $1,233.10.
"This has to do with the dollar getting stronger on the back of the more hawkish comments from the Fed," Oxford Economics analyst Daniel Smith said. "Yellen has highlighted a lot of risks around the Trump presidency, but nevertheless her foot is firmly poised over the accelerator."
"It makes sense if you think about the context — generally the U.S. is doing pretty well if you look at the data that's coming through."
The dollar index is down 0.08 percent for the day, at $101.17.
World stocks hit 21-month peaks after Yellen flagged a possible interest rate rise next month, while the dollar hit a one-month peak after the stronger-than-forecast data supported the view of a pick-up in U.S. economic growth.
"We remain cautious (on gold), given our expectation for solid growth, rising interest rates and a strengthening U.S. dollar ," Julius Baer said in a note.
The world's largest physically-backed gold fund, SPDR Gold Shares, said its holdings were unchanged on Tuesday. While it has seen inflows of 18 tonnes so far this year, that is well below the pace of increases a year ago, which saw inflows of 69 tonnes in the same period.
Regulatory filings showed on Tuesday that Paulson cut its stake in the fund as bullion prices posted their weakest quarterly performance in 3-1/2 years, while Soros Fund Management got out of gold in the fourth quarter of 2016.
