NEW YORK/LONDON: Gold turned higher after tapping the lowest level in more than two months on Thursday, as the dollar fell on unexpectedly weak US manufacturing data that raised doubts about the economy's strength.
Other US data showed initial claims for state unemployment benefits rose less than expected last week, pointing to sustained labor market strength.
Investors, however, are now focused on the release on Friday of the US nonfarm payrolls report for August to see whether it will put the Federal Reserve on track to raise interest rates later this year.
Spot gold touched its lowest level since June 24 at $1,301.91 an ounce, before rising 0.35 percent to $1,313.07 by 2:33 p.m. EDT (1833 GMT). US gold futures settled up 0.4 percent at $1,317.10.
"Generally speaking the US economy seems to have improved over the past few weeks and the interest rate expectations have risen quite significantly," Commerzbank analyst Daniel Briesemann said.
"Gold could fall below $1,300, even if the market is pricing in good jobs data tomorrow."
An upbeat payrolls report would reinforce the view that a US rate increase is likely before the end of the year after Fed Chair Janet Yellen said last week that the case for higher rates had strengthened.
Comments by other Fed officials, however, have been mixed.
Gold is highly sensitive to rising US interest rates, which increase the opportunity cost of holding the non-yielding asset.
"The market has found technical support in light of weakness in the dollar," said Eli Tesfaye, senior market strategist for brokerage RJO Futures in Chicago.
The market was respecting technical support around the 38.2 percent Fibonacci retracement level at $1,316, from the July high to May low, basis December, Tesfaye said.
"Technicals show that gold and silver prices need some correction and will see some mild rebound. But Friday's jobs data is going to be crucial," said Jiang Shu, chief analyst at Shandong Gold Group.
"If the jobs data is going to be good, gold will fall to $1,260-$1,270 levels as markets will hope for a rate hike in September."
Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, posted the first monthly dip in four months in August.
In other precious metals trading, silver gained 1.2 percent to $18.84 an ounce, while platinum dropped to a nine-week low of $1,035.15 an ounce. Palladium fell 2.2 percent to a six-week low of $654.72 an ounce.
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