Gold firmed on Monday after three straight weeks of losses as appetite for assets seen as higher risk, such as stocks, was hurt by soft euro zone data and political deadlock in Italy and the United States.
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Gold is down more than 5 percent this year, pressured by perceptions that stocks and other higher-yielding assets may offer a better return as global growth recovers. Its correlation with European stock markets turned negative last month.
European shares fell on Monday, however, as a political stalemate in the United States, where spending cuts that automatically kicked in on Friday threaten to dampen growth, hurt investor confidence.
The euro hit session lows against the dollar after a survey by research group Sentix showed euro zone sentiment fell in March for the first time in six months, due to fears of renewed political uncertainty following Italy's inconclusive election.
"There has been relentless liquidation and short-selling of gold, and it has become a little overdone on the downside," Societe Generale analyst Robin Bhar said.
"We've seen a few corrective bounces. The jitters in Europe, particularly in Italy, have helped that cause. The sequester kicked in on Friday in the United States; that helped its cause. So there have been a few worries that have come into the market to at least provide some short-term support," Bhar said.
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Spot gold was up 0.2 percent at $1,578.66 an ounce at 1305 GMT, while U.S. gold futures for April delivery were up $5.90 an ounce at $1,578.20.
Hedge funds and money managers increased their net long gold futures and options positions in the week to Feb. 26 after cutting them sharply in the previous week, Commodity Futures Trading Commission data showed on Friday.
"Clearly, participants were encouraged to reposition at these lower prices," Standard Bank said in a note.
GOLD ETFs STILL SEEING OUTFLOWS
However, the largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, showed an outflow of 0.6 tonnes on Friday, its eighth straight day of outflows after reporting the biggest ever one-month drop in February.
Gold prices fell for a fifth month in February for the first time since 1997 as investors lost faith in the metal, which failed to rally back towards record highs last year despite successive rounds of monetary easing from the Federal Reserve.
Ultra-loose monetary policy, known as quantitative easing, has supported gold in recent years by keeping up pressure on long-term interest rates and stoking fears over inflation, while concerns over global economic weakness boosted safe-haven flows.
"The fact that the United States and China are not doing badly at all is slowly but surely chipping away at the 'global systemic risk' driver of gold ETF demand," Citi said in a note.
"Furthermore, a strong dollar has never been a helpful variable for gold; should the dollar continue to benefit from a slowly recovering United States versus a Europe with a southern-countries millstone attached to it, then this will be an ongoing negative for gold."
Among other precious metals, silver was up 0.4 percent at $28.67 an ounce, while spot platinum was up 0.6 percent at $1,578.49 an ounce and spot palladium was up 0.7 percent at $724.50 an ounce.
Platinum pared its 2013 gains last month but has remained the best performer of the precious metals this year, up 2.3 percent, lifted by concerns over supply outages in South Africa and signs the global economy may be turning, boosting demand.
"Whereas the supply concerns persist, the outlook for growth looks less bullish as the situation in Europe has deteriorated again and U.S. spending cuts look more likely as the government starts to tackle the budget deficit," ScotiaMocatta said in a monthly note.
"The latter, combined with the fact prices had already rallied strongly, seems to have been enough to attract some profit-taking."