Gold rose after minutes from the Federal Reserve's June meeting showed officials are ready to unwind its balance sheet.
The Fed outlined a plan to reduce its $4.5 billion balance sheet of bond holdings it accrued while trying to stimulate the economy during and after financial crisis. However, officials were divided on when to start and did not release a timetable.
Spot gold rose 0.15 percent to 1,225.41 after initially falling 0.21 percent after the announcement. Futures for August delivery settled at $1,221.70, up $2.50.
A stronger dollar makes gold more expensive for holders of other currencies and higher bond yields raise the opportunity cost of holding non-yielding bullion. Interest rate rises meanwhile lead to higher bond yields and tend to boost the dollar.
"We've seen the dollar rebound from recent lows and treasury yields moving higher. That is a very powerful driver of the gold market," Julius Baer analyst Carsten Menke said.
Yields have risen sharply in recent weeks as several central banks signalled that they would tighten monetary policy, while Federal Reserve officials appeared undeterred by weak economic
data and low inflation.
That has caused gold prices to tumble more than 3 percent from a high of $1,258.81 on June 23.
"If the Fed minutes confirm they are sticking to their outlook for the economy and their projection of higher rates going forward, this is not going to help the gold market," said Menke, predicting prices of $1,200 by the end of the year.
Investors were also looking ahead to employment data on Friday that could influence the pace of rate rises.
In the nearer term, analysts at Commerzbank said technical support for gold was around its May low of $1,214.
In other precious metals, silver was down 0.25 percent at $16.03 an ounce, trading well below the psychologically important level of $16 for the first time since January. Platinum was 0.04 percent lower at $909.60 an ounce and palladium was down 1.25 percent at $840.85.
CNBC's Jeff Cox contributed to this report.