Gold steadied around a 3-1/2-month high on Thursday as prospects for further U.S. interest rate increases put the brakes on a recent rally, while palladium touched record highs on tight supplies.
Palladium rose 1.2 percent to $1,095.24 an ounce, earlier hitting a record high of $1,105.70.
The U.S. dollar hit a four-month low against the euro amid optimism about the euro zone economy. However, gold, which tends to move counter to the U.S. currency, was unable to capitalize on the dollar weakness and hovered just below its 3-1/2-month high hit yesterday.
"(Gold) is beginning to look overvalued. Our fair value for gold assuming a (U.S.) rate hike in March and June is around $1,230, so at current prices it looks expensive," said James Butterfill, head of research at ETF Securities.
Still, after digesting the U.S. Federal Reserve's minutes from its December policy meeting released on Wednesday, market participants have begun to doubt the sentiment that recent U.S. tax changes will lead to inflation, and the widely-expected path of future rate hikes, analysts said.
"They're starting to doubt that the Fed will hike rates as much as they said they will. That provides a more attractive environment for gold," said Daniel Ghali, commodities strategist at TD Securities in Toronto.
Gold is highly sensitive to rising U.S. interest rates because they increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.
Gold also benefited from safe-haven purchases. "That's why we think its likely to continue to trade between $1,200 and $1,300 over the next six months," Butterfill said.
Spot gold marked its highest since Sept. 15 at $1,321.33 on Wednesday but eased as the dollar recovered after minutes from the Fed's December policy meeting had initially bolstered expectations for more increases to U.S. interest rates.
Palladium's price jumped 56 percent last year on fears of a shortage fueled by Chinese car sales growth, tightening emissions controls and a swing away from diesel cars in Europe.
"We see palladium prices remaining well supported, although there is a danger from here of a short-term pullback as investors take profits," Mitsubishi said in a note.
Silver rose 0.3 percent at $17.18 per ounce after earlier hitting a eight-week high at $17.26.
Platinum rose 0.7 percent to $963 an ounce after earlier touching a 3-1/2 month high of $964.80.