By Clara Denina
LONDON (Reuters) - Gold snapped a two-day decline on Thursday as the dollar edged lower and signs of physical demand emerged from Chinese buyers.
Gains were kept in check by strong U.S. economic data that suggested an end to the U.S. Federal Reserve's stimulus programme.
Activity was relatively thin as U.S. financial markets were shut on Thursday for the Thanksgiving holiday.
"There's a bit of physical-related buying from the Far East, including China," MKS SA head of trading Afshin Nabavi said.
"Other than that, I don't think we are going to see a lot of fresh positions this week with the U.S. on holiday," he added.
Spot gold rose 0.7 percent to $1,244.85 an ounce by 1950 GMT. It had fallen to a 4-1/2 month low of $1,227.34 on Monday.
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U.S. gold futures rose 0.5 percent to $1,243.50 an ounce.
"The story for gold remains pretty much the same ... and the drivers for now remain the dollar and the U.S. data," VTB Capital Andrey Kryuchenkov said.
The dollar index fell 0.2 percent against a basket of currencies, retreating after a rise from mostly positive U.S. data in the previous session.
U.S. jobless claims unexpectedly fell last week and the November Thomson Reuters/University of Michigan consumer confidence improved from a preliminary reading. The Chicago PMI held up better than expected last month after surging in October.
A soft October durable goods report was the only dent to an otherwise upbeat set of figures.
Strong economic data could prompt the Fed to cut back on its $85 billion in monthly bond purchases, which have bolstered gold as an hedge against inflation over the past few years.
As a gauge of investor sentiment, holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 5.7 tonnes to 843.21 tonnes on Wednesday to their lowest since early 2009.
The fund has seen outflows of more than 450 tonnes this year as investors have put more money into rallying equities. Liquidation of ETFs has been a big factor in the more than 25 percent drop in gold prices in 2013.
CHINESE BUYING STRONG
China, which is expected to overtake India as the biggest consumer of the metal this year, has seen a pick-up in demand this week due to lower prices.
Traded volumes of 99.99 percent purity gold on the Shanghai Gold Exchange hit 18.3 tonnes on Thursday, their highest since October 8, according to Reuters data.
China's net gold imports from Hong Kong climbed to their second highest on record in October as it bought more than 100 tonnes of gold for a sixth straight month to meet unprecedented demand.
Silver rose 0.3 percent to $19.69 an ounce after falling 1 percent in the previous session. Spot platinum gained 0.4 percent to $1,354.40 an ounce after losing more than 1 percent in each of the previous two sessions, and spot palladium gained 0.4 percent to $716.20 an ounce.
(Additional reporting by Scott Haggett in Calgary; Editing by Keiron Henderson, Jane Baird and Marguerita Choy)