Gold was trading near a one-week high on Tuesday, buoyed by short-covering gains in the previous session, but still looking likely to drop back as physical demand remained lacklustre and uncertainty over the U.S. stimulus outlook weighed.
Spot gold was unchanged at $1,251.96 an ounce by 0339 GMT. It hit $1,256.49 in early trade, its highest since Nov. 20.
On Monday, spot gold fell to a 4-1/2-month low near $1,225 an ounce before recovering to gain nearly 1 percent from short covering and options-related buying.
The metal fell below $1,300 three weeks ago and has been unable to reclaim that level. Traders expect prices to be pressured until there is a definitive timeline on when the U.S. Federal Reserve will begin cutting its economic stimulus.
"The main driver for gold is the prospect of quantitative easing and the dollar," said Barnabas Gan, an analyst at OCBC Bank. "Prices will be capped till we get cues on tapering."
Gold prices have lost about a quarter of their value this year on fears the Fed would begin tapering the $85 billion in monthly bond purchases that have burnished bullion's appeal as a hedge against inflation.
Some fear the US central bank could begin cutting back from next month. Others say recent mixed economic data could push the cut back to next year.
The next major data release is on Dec. 6, when nonfarm payroll data is expected. The Fed's next policy meeting will be held on Dec. 17-18.
"Given the market is still positioned short, we can continue to expect bouts of volatility," ANZ analysts said in a note.
"The overnight move does little to change our view that the market will continue to trade in a weak fashion while physical demand remains lacking."
Physical demand, which usually provides a floor to prices, has failed to pick up the way it did earlier this year when prices fell over $200 an ounce in two days. Buying picked up when prices fell below $1,230 on Monday but quickly died down as prices shot up again, dealers said.
Premiums in Shanghai for 99.99 percent purity bars fell to about $7 an ounce on Tuesday from $13 in the previous session.
Outflows from gold funds continued, with SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, losing 3.30 tonnes on Monday. Outflows from the ETF, about 450 tonnes so far this year, have played a big role in denting prices.