Gold steadied on Wednesday after falling 2 percent to a near three-month low the day before, when a bigger-than-expected drop in U.S. consumer confidence and an option expiry prompted heavy selling.
The position adjustment related to expiring COMEX August gold options pushed prices close to a key technical support, where the market was likely to hover before finding fresh clues for direction, traders said.
With increasing market scrutiny on nations' fiscal health and doubts over the effectiveness of ultra-low monetary policies in supporting the economy, governments around the world are facing difficulties finding fresh ways to stimulate the economy and beat deflationary pressures, said Koichiro Kamei, managing director at Tokyo-based researcher Market Strategy Institute Inc.
Expectations for rising inflation as a result of stimulative policies or concerns about a further deterioration in fiscal deficits as a result of more government spending have largely supported gold prices, which hit a record high in late June.
Reasons supporting investor buying of gold have weakened recently, and options-related technical selling could undermine sentiment in the short-term as investors seek fresh clues for direction, Kamei said.
He added that the market was close to the support of its 200-day moving average, which on Wednesday stood at around $1,148.
Key events closely watched by investors include the U.S. Beige Book report due later in the day, as well as U.S. monthly jobs data due next week and the U.S. Federal Reserve policy decision next month, Kamei said.
Spot gold was at $1,163.45 an ounce as of 10:38 p.m. ET on Tuesday, up 0.3 percent from late New York levels of $1,159.65 per ounce.
Spot gold fell to a low of $1,157.65 an ounce on Tuesday, the cheapest price since May 5. Bullion also posted its biggest one-day decline since July 1.
U.S. gold futures for August delivery rose 0.4 percent to $1,162.60 per ounce, after settling on COMEX at a three-month low of $1,158.00 an ounce.
Spot gold could consolidate above $1,157.65 per ounce for a trading session before falling toward $1,140, as a rebound is expected after the previous session's sharp fall, according to Wang Tao, a Reuters market analyst for commodities and energy technicals.
Gold priced in euros and sterling recovered from multi-month lows hit on Tuesday.
Euro-priced gold was at 895.77 euros an ounce, while sterling-denominated bullion stood at 746.92 pounds per ounce.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust (GLD.P) said its holdings fell to 1,300.829 tonnes by July 27, down 0.913 tonnes from the previous business day.
(Reporting by Chikako Mogi; Editing by Joseph Radford)