China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects concern about resurgent asset prices and could mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy.
The dollar soared at the news, and held steady on Wednesday morning as investors poised to cut short positions.
"In the short term, gold will be under pressure, as investors switch over to the dollar from commodities. In addition, some investors have chosen to close their positions after sizeable profit," said Hou Xinqiang, an analyst at Jinrui Futures in China.
"For gold, we might see a correction taking prices down to as low as $1,300."
Spot gold was flat at $1,336 an ounce by 0242 GMT. It fell to a two-week low of $1,334.45 on Tuesday, compared to an all-time high of $1,387.10 hit last week.
A bout of buying from bargain hunters in the region helped stabilize prices in early Asian trade, dealers said.
"We are seeing a little bit of bargain-hunting. The market has not really seen a turnaround, even though there are talks of correction," said Ronald Leung, a physical dealer at Lee Cheong Gold Dealers in Hong Kong.
Policy changes in the United States are likely to remain the most closely watched factor in the market, Leung and others said.
"So long as the U.S. interest rate stays on the low end, and China's interest rate doesn't rise too quickly, the market still has a chance to move higher."
Holdings in the SPDR Gold Trust slipped less than one ton to a one-week low of 1,300.089 tons.
In other markets, industrial metals pared sharp losses in early trade.
"It seems to me there was a very knee-jerk reaction to the China move across all commodities, and now people are starting to step back and think about what it actually means for Chinese growth," said Yingxi Yu, a commodities analyst with Barclays Capital.
"The answer is probably not much. It's a 25 basis point increase in an economy that is still growing very strongly. The actual impact of this rate hike might be limited on the overall growth story in China. People were just trying to manage their positions. I don't think fundamentally it changes the demand story."
Spot silver gained more than half a percent to $23.45 an ounce, after tumbling 4.2 percent in the previous session.
Platinum fell to $1,652, its lowest so far this month, before recovering to $1,666.