Gold edged higher on Tuesday, after weak manufacturing data across the globe rekindled hopes for more easing from central banks to support recovery.
Gold thrives on abundant money supply and low interest rates, which increases inflation outlook and benefits bullion which is seen as a hedge against rising prices.
U.S. manufacturing shrank in June for the first time in nearly three years, following a string of data from Europe and Asia that suggested the euro zone debt crisis was reverberating throughout the global economy.
"You can take it as a sign that chances of QE (quantitative easing) are improving," said Dominic Schnider, an analyst at UBS Wealth Management in Singapore.
But this does not mean that a QE will come anytime soon, he cautioned, given the Fed just recently extended its "Operation Twist" programme which involves selling short-term securities to buy longer-term ones to keep long-term borrowing costs down.
"We are unlikely to see a big add-on after Operation Twist was extended, unless things fell off the cliff. And remember, when things did fall off the cliff in 2008, gold fell as well."
Spot gold edged up 0.3 percent to $1,601.74 an ounce by 0349 GMT. U.S. gold futures contract for August delivery also gained 0.3 percent to $1,602.50.
The all-important U.S. non-farm payrolls due Friday, expected to shed light on the state of the labour market in the world's top economy, will be scrutinised by investors eager to predict the next move by the U.S. Federal Reserve.
Physical market quiet again
Asia's physical gold market fell back into slumber after short-lived excitement late last week when bullion dropped below $1,550 per ounce before staging a 3-percent rally.
"Customers went in to pick up gold below $1,560 last week but now the market is quiet again," said a Singapore-based dealer, adding that gold bar premiums were about 70 cents above London prices.
A rally in the rupee against the dollar last Friday helped gold purchases from India, traditionally the world's top bullion consumer.
Spot silver rose nearly 0.9 percent to $27.72, holding close to last Friday's high of $27.91.
"The dimmed economic outlook leads to expectations of more stimulus, which will weaken the dollar and help metals," said a Shanghai-based trader.
"Of course silver will be relatively weaker than gold due to its industrial nature, but we do sense anticipation of a further price rise in the physical market."
