Gold edged higher on Tuesday as the dollar retreated but was still near its lowest level since early July after U.S. data fuelled expectations that the Federal Reserve is set to taper its monetary stimulus.
Data released on Monday showed the ISM gauge of U.S. factory activity hit a 2-1/2-year high in November, potentially bringing the Fed closer to scaling back its huge quantitative easing programme, a move that would support the dollar.
It would also weigh on gold by relieving pressure on long-term interest rates while potentially dampening expectations that inflation will rise in years to come. Gold hit a five-month low at $1,217.69 an ounce after the report.
Spot prices were up 0.2 percent at $1,221.96 an ounce at 1337 GMT. U.S. gold futures for February delivery fell 40 cents an ounce to $1,221.50.
The dollar index fell 0.3 percent, giving some support to gold, but investor interest remains muted, traders said.
"Sentiment remains bearish, and larger players choose to stay away for now," Andrey Kryuchenkov, an analyst at VTB Capital, said. "Given QE uncertainty, why would you want to boost your gold holdings?"
He added, "The greenback (will) remain relatively firm in 2014 and the market is well aware of that. The opportunity cost of holding gold will only increase from here, while subdued inflation and reduced macro risks make its safe-haven or inflation-hedging properties obsolete."
Investors have heavily sold gold in 2013, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Shares, plummeting more than 500 tonnes this year to their lowest since January 2009.
PHYSICAL BUYING SOFT
Dealers said buying among consumers in Asia, the world's biggest market for physical gold, increased on Tuesday due to the sharp overnight drop in prices, but many consumers remained on the sidelines as they expected prices to go even lower.
In China, the largest buyer of bullion, premiums of 99.99 percent purity gold climbed to about $11 an ounce from $7 on Monday on the Shanghai Gold Exchange, still far short of the $30-$40 levels seen in April-May.
"There has been a fair amount of inventory build, I suspect particularly with the local banks," Philip Klapwijk, managing director of Hong Kong-based metals consultancy Precious Metals Insights, told the Reuters Global Gold Forum on Tuesday.
"These bank, and to a lesser extent trade, stocks are curtailing demand in Q4 to date. You can see this from the lack of response to the major drop in gold prices lately. Premia have not moved up really much at all."
Data from the U.S. Mint showed its sales of gold American Eagle coins fell to 48,000 ounces last month from 136,500 in November 2012, while the Perth Mint's November sales of gold bars and coins dropped by nearly a third.
U.S. Mint sales of American Eagle silver coins in November fell 27 percent year-on-year.
Silver was flat at $19.14 an ounce, while spot platinum was up 0.3 percent at $1,341.50 an ounce, and spot palladium was up 0.2 percent at $710.22 an ounce.