Gold prices eased on Tuesday ahead of this week's Federal Reserve policy meeting, on expectations that the U.S. central bank may soon be set to taper its bullion-friendly economic stimulus programme.
The Fed begins its latest two-day policy meeting on Tuesday. Most economists polled by Reuters this week expect it to taper its huge bond-buying programme in March, although the odds on a move this month or next have shortened after a run of upbeat data.
Spot gold was down 0.3 percent at $1,236.30 an ounce at 1022 GMT, while U.S. gold futures for February delivery were down $8.10 an ounce at $1,236.30.
Expectations that the Fed will curtail its stimulus programme, which has driven gold prices higher in recent years by pressuring interest rates and fuelling fears of inflation, have already pushed gold prices 25 percent lower this year.
"For gold, any hint of a reduction in QE3 would probably be bearish, (pushing gold back) to potentially 1220-1200," VTB Capital analyst Andrey Kryuchenkov said.
"As soon as (the price) comes back towards 1220, there are some opportunities for physical buying and investor buying," he added. Gold has tried and failed to push significantly below that level several times in the last month, he said.
With money managers' bearish bets in U.S. gold futures and options close to a 7-1/2 year high, some investors fear that gold's downward move has been overdone. Their recent moves to cover short positions have supported gold prices.
"Post the FOMC meeting, we are more favourable towards gold given recent COMEX data, which show that speculators still hold significant short positions on gold," HSBC said in a note. "The approaching year-end may lead to a covering of spec shorts, which is price supportive."
ASIAN CONSUMERS HOLD OFF
Key consumers of physical gold in Asia also held off fresh purchases in anticipation of lower prices.
Volumes on the Shanghai Gold Exchange this week have been subdued, with less than 10 tonnes per day traded for 99.99 pct purity gold, compared to last week's average of nearly 14 tonnes a day.
In India, buying remained low key due to non-availability of stocks, supporting premiums.
The Indian government slapped a record import duty of 10 percent on gold earlier this year and tied imports for domestic consumption with exports, in a bid to curb a rising trade gap.
"The main problem for gold is that with Indian demand soft because of the weak rupee plus new import duties, the physical market is struggling to offset investor liquidation," Barclays Capital said in a note on Tuesday.
"Moreover, with investors having accumulated a lot of gold at around the $1,000 an ounce level, liquidation is likely to accelerate should prices look like breaking below this point," it added.
Investment demand for physical bullion was lacklustre, with the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Shares, posting its biggest daily outflow in nearly two months on Monday.
The fund's holdings were down 8.7 tonnes to 818.9 tonnes, their lowest in nearly five years.
Among other precious metals, silver was up 0.1 percent at $19.94 an ounce, while spot platinum was down 0.2 percent at $1,354.75 an ounce and spot palladium was up 0.1 percent at $714.75 an ounce.