Dovish Yellen, Softer Dollar Support Gold Near $1,240
Some analysts say gold could be subject to downside risks as focus now shifts to key US jobs data due this week
Gold held on to sharp overnight gains on Wednesday, buoyed by a softer dollar and Federal Reserve chair Janet Yellen's remarks that the U.S. central bank should be cautious in raising interest rates.
Gold is highly sensitive to U.S. monetary policy, as rising interest rates lift the opportunity cost of holding non-yielding bullion, while boosting the dollar. The metal slid 3 percent last week after hawkish comments from several Fed officials.
In her first comments since the Fed decided to hold rates steady two weeks ago, Yellen said on Tuesday inflation has not yet proven durable against the backdrop of looming global risks to the U.S economy, and that the Fed should proceed only cautiously on rate hikes.
Spot gold had dipped 0.5 percent to $1,236 an ounce by 0305 GMT, after gaining 1.7 percent on Tuesday.
Some profit-taking following the overnight jump in prices has taken gold lower but the metal will consolidate around $1,235-$1,240, said MKS Group trader Sam Laughlin.
However, some analysts said gold could be subject to downside risks as focus now shifts to key U.S. jobs data due this week.
"Though the rally looks intact it can be dented by a good employment number in the non-farm payrolls release for March scheduled for Friday," said HSBC analyst James Steel. "A number above 200,000 new net jobs could wear on gold and clip recent gains."
Markets expect non-farm payrolls to grow by 205,000, according to a Reuters poll.
A strong payrolls number could push the Fed to raise rates earlier than current market expectations.
U.S. federal funds futures rose on Tuesday, implying traders now think the Fed will not raise interest rates until late 2016.
Dollar bulls were on the defensive early on Wednesday after yet another setback inflicted by Yellen, whose cautious tone left markets wondering if there will be even one hike in U.S. interest rates this year.
Assets in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.40 percent to 820.47 tonnes on Tuesday - the first drop in two weeks.
Holdings are still near their highest in over two years as wider turmoil in the stock markets has burnished gold's safe-haven appeal. Yellen's dovish tone could trigger further interest in gold funds.