Gold reversed early losses on Thursday as the U.S. dollar languished at seven-week lows, with traders covering short positions in the precious metal.
Gold is now up for a second straight session, having fallen to a three-week low early on Wednesday on fears of a stimulus wind-down by the U.S. Federal Reserve from next month.
“The buying today is due to short covering since not much is happening to strengthen the U.S. dollar,” said a Sydney-based precious metals trader.
“Investors are selling their long U.S. dollar and buying other currencies and gold.”
Spot gold had gained 0.5 percent to $1,292.96 an ounce by 3.07am GMT. U.S. gold rose about $7 to $1,292.10.
The dollar crumbled to seven-week lows on Thursday after the yen ploughed through major resistance levels in a stop-loss frenzy.
Traders said the short-covering in gold could push prices through the $1,300-mark.
Gold has lost nearly a quarter of its value this year after strong economic data prompted talk the Fed could scale back its support for the economy.
Cleveland Fed President Sandra Pianalto said on Wednesday that the U.S. central bank could begin reducing the pace of its bond-buying stimulus if recent improvement in the U.S. job market persists.
Other key Fed policy makers, including Chicago Fed President Charles Evans and Dallas Fed President Richard Fisher, said earlier this week that stimulus could be cut as early as September, depending on economic data.
The slide in gold prices earlier this week stirred up some buying interest in China, which is set to overtake India this year as the world’s top gold consumer.
Shanghai futures rose on Thursday after a two-day fall.
“Physical demand from the Far East continued to provide support for gold,” HSBC analysts said. “Despite the pick-up in physical buying, downside risks to bullion persist as the near-term momentum appears to be negative for gold.”