Gold edged to a three-month high on Tuesday as weak global manufacturing activity underscored the challenges for the world economy, pushing investors towards safe-haven assets.
Increased volatility in other assets has benefitted gold and it could see more gains as global central banks may be forced into easing monetary policy further this year to spur growth.
With rates close to zero, the "only option is to move either towards zero or negative rates as the Japanese and selected European countries are already doing in a desperate attempt to force banks to lend", INTL FCStone analyst Edward Meir wrote to clients.
"Whatever the case, this should be constructive for gold."
Spot gold touched USD 1,130.11 an ounce, its strongest since Nov. 3, and was trading down 0.2 percent at USD 1,126.55 by 0226 GMT.
A break above USD 1,136 could lift gold towards USD 1,157, a level reached in late October, said ScotiaMocatta technical analysts.
US gold for April delivery was flat at USD 1,127.30 an ounce.
Reflecting growing confidence in gold, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose to 21.9 million ounces on Monday, the most since Nov. 3.
Global manufacturing expansion accelerated slightly but remained weak at the start of 2016 as faster growth in developed markets failed to offset a contraction in emerging economies. In China, a gauge of factory activity fell to its lowest since mid-2012.
The US economy could suffer if recent volatility in financial markets persists and signals a slowdown in the global economy, Federal Reserve Vice Chairman Stanley Fischer said.
Gold is typically the asset of choice in times of uncertainty. It posted its best monthly jump in a year in January, and has gained more than 6 percent so far in 2016, after falling 10.4 percent last year.
The Fed's statement last week that it will closely monitor the global economy and financial markets lifted gold to near USD 1,130, as it underlined expectations that US policymakers may take it slow in raising interest rates this year.
"Weaker macro numbers out of the US are also increasing the odds that the Fed's December move could have been an outlier, forced onto a central bank that basically had to move after promising to do so for much of the last year," said Meir who sees only one US rate hike this year.
Spot platinum fell 1 percent to USD 860.85 an ounce, palladium was steady at USD 500.16 and so was silver at USD 14.31.
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