Gold prices steadied on Thursday after two days of losses as traders took to the sidelines ahead of a key U.S. employment report on Friday, which will be closely watched for clues on the outlook for Federal Reserve policy.
Gold hit a one-week low after Wednesday's ADP private sector jobs report lifted expectations that the Fed will trim its bond-buying scheme sooner rather than later, after opting to cut monthly purchases by $10 billion in December.
Expectations that the programme was coming to an end was a key factor in last year's 28 percent gold price drop.
Spot gold was at $1,226.81 an ounce at 1510 GMT, little changed from Wednesday, while U.S. gold futures for February delivery were up 90 cents an ounce at $1,226.40.
The metal has risen nearly 2 percent this month as stock markets corrected and Chinese consumers bought ahead of the Lunar New Year, but has struggled to build on those gains as European stocks rebounded to 5-1/2 year highs.
"Gold attempted to get through the $1,250 area and failed, and since then it has been back and forth between $1,220 and $1,230," MKS' head of trading Afshin Nabavi said. "The market has been directionless because of this lack of knowledge (of the outlook for U.S. monetary policy)."
"Tomorrow, with the non-farm payrolls, we may get a better idea of what the actions of the Fed will be."
U.S. nonfarm payrolls for December could come in around 230,000, Mark Zandi, chief economist at Moody's Analytics, said on Wednesday. The unemployment rate, meanwhile, will likely stay at 7 percent, he said.
A stronger than expected reading would likely support expectations that the Fed will act sooner rather than later to further reduce stimulus, analysts said.
"Tomorrow, I expect the labour market report will come in slightly above expectations," Peter Fertig, a consultant with Quantitative Commodity Research, said. "That will overall be positive for the stock market and negative for the precious metals."
On the wider markets, the dollar index steadied and was off early lows after the European Central Bank firmed up its guidance that interest rates would stay very low for an extended period, hurting the euro.
CHINESE BUYING STEADIES
Buying of gold in China, which is tipped to have taken over from India as the world's biggest bullion consumer last year, steadied on Thursday after a strong start to the week, dealers said. Premiums on the Shanghai Gold Exchange held at $17.
The world's largest gold-backed exchange-traded fund, New York's SPDR Gold Shares, reported its first outflow of the year yesterday, of 1.5 tonnes, taking its holdings to a five-year low of 793.121 tonnes.
Last year the fund saw an outflow of more than 550 tonnes, the first year its holdings had fallen since its launch in 2004. Commodity exchange traded products suffered their worst year on record in 2013 as investors dumped their gold holdings and joined the equity rally, BlackRock data showed.
Bank of America Merrill Lynch said on Thursday it has cut its 2014 gold price forecasts by 11 percent to $1,150 an ounce, and its silver price forecasts by 21 percent to $18.38.
"While index rebalancing may support gold until 14 January, we see limited support to prices beyond that," it said. "Our continued bearish view is driven by the challenging macro-economic environment, which is best captured by rising U.S. 10-year rates and a persistent lack of inflation pressures."
Among other precious metals, silver was down 0.1 percent at $19.49 an ounce, while spot platinum was flat at $1,412.99 and spot palladium was up 0.2 percent at $735.22.