"(Gold) is beginning to look overvalued. Our fair value for gold assuming a (US) rate hike in March and June is around $1,230, so at current prices it looks expensive," said James Butterfill, head of research at ETF Securities. He added, however, that gold is being used as an insurance policy against geopolitics and uncertain monetary policy.
"That's why we think its likely to continue to trade between $1,200 and $1,300 over the next six months," he said. Spot gold edged up 0.2 percent to $1,314.92 an ounce by 1500 GMT, while US gold futures dropped 0.2 percent to $1,315.80.
Spot gold marked its highest since September 15 at $1,321.33 on Wednesday but eased as the dollar recovered after minutes from the Federal Reserve's December policy meeting bolstered expectations for more increases to US interest rates. The US currency was also given a boost on Wednesday by strong manufacturing and construction data.
Gold is highly sensitive to rising US interest rates because they increase the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced. "People are looking to lock in some gains after a pretty strong rally over past weeks," said ANZ analyst Daniel Hynes.
Palladium rose 1.8 percent to $1,101.80, having touched a record high of $1,103.50. The metal's price jumped 56 percent last year on fears of a shortage fuelled by Chinese car sales growth, tightening emissions controls and a swing away from diesel cars in Europe.
"We see no reason that the fundamental tightness in the (palladium) market will change any time soon," Mitsubishi said in a note. "We see palladium prices remaining well supported, although there is a danger from here of a short-term pullback as investors take profits." Silver rose 0.3 percent to $17.17 after hitting a six-week high on Wednesday at $17.24. Platinum rose 0.3 percent to $959.60.