World stocks extended their robust start to the year, making non-yielding bullion a less attractive investment, while the greenback was on course for a fourth straight day of gains. "One of the things potentially capping gold's rally here is the fact that the US Federal Reserve's dovishness points to stronger demand for riskier assets," said Marcus Garvey, analyst at ICBC Standard Bank.
"The big question now is how much the Fed's position has changed and can it get more dovish... But given the fact that the US domestic data is reasonably stable, there is still scope for the Fed to hike rates once this year." Gold rose to its highest since late April at $1,326.30 last week, after the Fed kept interest rates steady and said it would be patient on further hikes amid a cloudy outlook for the US economy due to global growth concerns and the US-China trade dispute.
Gold tends to fall out of favour when interest rates rise. Attention has now turned to US President Donald Trump's State of the Union address which could hint at progress in US-China trade talks. "I think gold should see itself through $1,360, a strong resistance, to get absolute confirmation that it is in a bull run," said Ross Norman, chief executive at Sharps Pixley.
Meanwhile, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, dropped 0.5 percent to 813.29 tonnes on Monday. Holdings have fallen for a second straight session. "On the downside, support around $1,300 should be strong in the short-term (for gold) and we favour buying dips towards that level," MKS PAMP Group said in a note.