Scattered physical demand lifted gold in Asian afternoon trade on Thursday, but the market lacked direction and was vulnerable to volatile moves due to thin liquidity.
"I have seen some buying interest out of Asia, but I think the crucial levels are $394 and $395. If that breaks by the end of this week, we can see a big correction downward," said one dealer in Sydney.
Spot gold was quoted at $397.00/397.75 compared with $395.75/396.45 last quoted in New York. Key resistance was pegged at $405 an ounce.
Spot gold fell to a three-month low of $392.50 an ounce on Wednesday following a rebound in the US dollar, which reduces the precious metal's safe-haven appeal.
Gold touched a 15-year peak of $430.50 an ounce on January 6 when the euro hit a record high against the dollar.
"If the market holds above $395, I think we will see a range trade up to $400, $405 or $406. We could possibly see the market go higher than that, but we are likely to see a $10 range," said the Sydney dealer.
The dollar steadied in Asia after a 1.5 percent gain against the euro in New York trading as political pressure mounted for a cut in European interest rates to counter the single currency's appreciation against the greenback.
The dollar was quoted at 108.86 yen, and the euro stood at $1.2499.
"The $394/395 level is still providing key support," said N M Rothschild in a report.
"A close below this level tomorrow (on Friday and month end) will open the way to further losses towards $385."
It said physical demand will support the market but if traders perceived that prices might fall they would move to the sidelines.
Tokyo gold futures tracked declines in Comex market.
The new benchmark February 2005 contract on the Tokyo Commodity Exchange (TOCOM) lost 11 yen per gram to 1,390 yen.
Silver was quoted at $6.56/6.58 an ounce, platinum at $857/862 an ounce and palladium at $226/231 an ounce.