Gold jumped more than a percent to a one-week high on Thursday as investors dumped equities, but the metal still risked losing its safe-haven appeal on worries the U.S. Federal Reserve could scale back its bullion-friendly bond buying programme.
The Fed's stimulus programme has pushed money into riskier assets such as commodities and stoked inflation fears, but signs of strength in the U.S. economy may prompt the central bank to slow its $85 billion-a-month buying pace.
Gold hit an intraday low around $1,388 an ounce before rallying to as high as $1,410.51, its highest since May 22, as investors shifted some money back to bullion. It stood at $1,407.52 by 0714 GMT, up about 1 percent.
"I am looking for near term rebounds towards a relatively short-term pivotal zone of $1,445 to $1,450," said Tim Riddell, head of ANZ Global Markets Research, Asia.
"However, any slippage below $1,397 would be enough to shake me out of this view."
Gold has fallen 16 percent this year, hitting a 2-year low around $1,321 in April on signs of global economic improvement and amid fears that central banks could start to curtail easy money policies.
"This is a very tricky issue. I don't think Fed chairman Ben Bernanke really wants to start tapering stimulus, but more and more policymakers are for it," said Joyce Liu, an investment analyst at Phillip Futures.
But strong premiums for gold bars in Asia have indicated jewellers and retail investors are happy to buy bullion on dips. In Singapore, supply constraints have sent premiums to all time highs at $7 to spot London prices.
"It seems that every time there's a dip, people will start coming to the market to buy," Liu said.
U.S. gold rose as high as $1,410 an ounce, its strongest since May 22.
Japanese equities led a tumble in Asian shares as the dollar slipped to fresh lows against the yen on Thursday, with investors worried about what might happen if the Fed winds back its massive stimulus programme.
Asian gold demand from April to June will reach a quarterly record as the region's bullion consumers take possession of supply freed up by selling from exchange-traded funds (ETFs), the World Gold Council said on Wednesday.