Markets were also digesting minutes of the Federal Reserve policy meeting released on Wednesday to gauge the U.S. central bank's outlook for the pace of its stimulus tapering this year. The minutes showed many Fed officials wanted to proceed with caution in scaling back its bond-buying programme, but strong U.S. data seemed to indicate that the Fed is likely to continue cutting its stimulus.
Spot gold edged up 0.1 percent to $1,226.90 an ounce by 0737 GMT, after a 1 percent drop over the prior two sessions."The main factor for gold this year is how the Fed is going to go forward with its QE tapering," said Barnabas Gan, an analyst at OCBC Bank, referring to quantitative easing.The U.S. central bank surprised many investors by deciding at its meeting last month to cut its bond purchases by $10 billion, bringing them to $75 billion per month.The outlook for the U.S. economy seems favourable, and gold being a dollar denominated commodity will be sensitive to dollar strength should the tapering continue," said Gan, who sees a downside risk of $1,150 for gold prices.The dollar hovered at seven-week highs against a basket of major currencies early on Thursday, having risen for a second session after an upbeat private-sector jobs report drove U.S. short-term yields and market rates higher.A stronger greenback makes gold more expensive for holders of other currencies.Traders are eyeing U.S. weekly jobless claims data expected on Thursday and the more-significant nonfarm payrolls on Friday for clues on the health of the economy. Investor sentiment continued to be bearish towards gold with holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, falling 1.50 tonnes to 793.12 tonnes on Wednesday - the lowest in five years.On the physical side, premiums on the Shanghai Gold Exchange were steady at $17 an ounce as demand picked up ahead of the Chinese New Year.