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Gold held on to overnight gains and was trading near its highest in a week on Wednesday, supported by a softer dollar, but rising bond yields and uncertainty over the timing of a possible US rate hike kept the rally in check.
Spot gold was steady at $1,193.60 an ounce by 0328 GMT, not too far from a one-week top of $1,196.60 reached on Tuesday.
The near one per cent gain in prices in the previous session was triggered by safe-haven bids as the dollar fell and stocks took a hit from volatility in global bond markets.
German bond yields had climbed on Tuesday on optimism that inflation may have bottomed in the euro zone, lifting demand for the euro.
US 10-year Treasury yields hit six-month highs before steadying. Typically, higher bond yields would have reduced investment the demand for non-yielding gold.
“The question facing gold is will bullion derive more upwards thrust from a weaker dollar or will rising yields sap and possibly reverse the rally?’’ said HSBC analyst James Steel.
“It appears that the currency markets are more influential in aiding bullion, at least near term, although gold is running into resistance at the $1,200 an ounce psychological level.’’
The dollar was also on the defensive ahead of US retail sales data due later in the day.
Financial markets are closely watching US data to gauge the strength of the economy and how that would impact the Federal Reserve’s interest rate policy. Strong data could prompt an early rate hike, boosting the greenback and hurting non-interest-yielding gold.
Fed officials had provided no clarity on Tuesday on when the US central bank would make such a move. The Fed’s ability to delay its initial interest rate hike to head off economic shocks is now “more limited’’ than its ability to quickly tighten monetary policy in response to positive surprises, a top Fed policymaker said.
Another top Fed official said he does not know when interest rates will rise, but he tempered that uncertainty by applauding an apparent consensus between markets and the US central bank that it will happen later this year.
Traders are now waiting for a batch of economic data from China, Europe and the United States for direction. Further weakening of the dollar or global equities following the data could boost safe-haven demand for gold.
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