After hitting a two-week low earlier in the session, prices of the precious metal started inching up on Thursday, responding to a 0.5% fall in the dollar against a basket of currencies.
Spot gold rose 0.73% to $1,246.15 an ounce by 6.52 EST, while February US gold futures were up by 0.6% at $1245.90 an ounce.
“Gold has recovered from the strong support of $1234 an ounce and is currently headed higher. On the upside strong resistance is at $1255 an ounce and only breach above the same could resume an uptrend. Short term bias is sideways to positive," said Motilal Oswal in a research report.
Investors are now awaiting the outcome of a Fed meeting on January 28 and 29, amid speculation that there could be another cut in the bond-buying programme if the world's largest economy continues to improve.
They are also focused on US weekly jobless claims and manufacturing data, scheduled to be released later on Thursday, to gauge the Fed's tapering plan.
While uncertainties about the tapering earlier last year and the subsequent announcement of the partial rollback of stimulus measures from January 2013 kept investors on edge, muted demand in largest consumer India following an official crackdown to trim the trade deficit knocked the shine off the precious metal. Although strong purchases by China ahead of the Lunar Year aided a gold rally this year, tapering of stimulus and signs that the US economy is witnessing a sustained recovery would wane gold's appeal as a safe-haven asset significantly, especially in times of low inflation there, analysts said.
An end to the Fed's quantitative easing programme hurt gold, as the precious metal's rally in recent years was aided by a low interest rate environment, which prompted investors to shift to haven assets like gold to beat inflationary pressure.
Holdings in SPDR Gold Trust, the largest gold-backed exchange-traded fund and a good measure of investor sentiment, fell 1.20 tonne to 795.85 tonne on Wednesday, according to Reuters data.
In the physical market, premiums for 99.99% purity gold on the Shanghai Gold Exchange — a physical trading platform — remained unchanged at $12.