Gold prices rose for a third day on Wednesday as the dollar weakened and U.S. bond yields fell despite solid U.S. economic data that reinforced expectations that the Federal Reserve will press ahead with increases to U.S. interest rates.
The data showed an unexpected rise in U.S. retail sales in October and a pick-up in underlying inflation.
However, the outlook for U.S. tax cuts that could stimulate economic growth was clouded after U.S. Senate Republicans created new political obstacles by linking the repeal of a key component of Obamacare to the tax reform plans.
"The biggest factor right now shoring up gold is the weaker dollar," said Robin Bhar, head of metals research at Societe Generale.
"Also, there's speculation that tax cuts could be a long time coming, meaning the Fed will not have to be as aggressive as it might have been."
A weaker dollar makes gold cheaper for holders of other currencies, which can stimulate demand, while lower bond yields make gold more attractive by reducing the opportunity cost of owning non-yielding bullion.
Higher interest rates tend to push bond yields higher and boost the dollar.
Spot gold slid 0.23 percent at $1,277.71 an ounce at 1:45 a.m. ET after touching $1,289.09, the highest since Oct. 20. The metal has gained 0.8 percent this week.
U.S. gold futures for December delivery fell 0.42 percent to $1,277.50.
ANZ analyst Daniel Hynes said Wednesday's inflation data could be a trigger to break gold from the $1,265 to $1,290 range in which it has traded since mid-October.
The consumer price numbers came after data on Tuesday showed producer prices rose more than expected in October.
"With signs that underlying inflation pressures are starting to pick up again, we think the Fed will need to step up the pace of tightening next year, raising the Fed funds rate a total of four times in 2018," Capital Economics economist Michael Pearce said in a note.
On the technical side, resistance was at the 50-day moving average around $1,292 and a Fibonacci level at $1,297.70, ScotiaMocatta analysts said.
In other precious metals, silver fell 0.19 percent to $16.978 an ounce, platinum rose 0.54 percent to $930.70 and palladium fell 0.46 percent to $981.25 after touching a two-week low of $974.25.