Gold prices slipped on Wednesday, after three days of gains during which short-sellers rushed to cover bets on sharp price falls, as a tentative U.S. budget deal returned the focus to prospects for the Federal Reserve to curb monetary stimulus.
Spot gold was 0.3 percent lower by 1240 GMT at $1,256.91 an ounce, having hit its highest in three weeks on Tuesday. Trade has been volatile as the short-covering rally came after the price fell to a five-month low last week.
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U.S. Gold futures for February delivery were down $5.10 at $1,256.
A bipartisan budget deal announced in the U.S. Congress on Tuesday, though modest in its spending cuts, is expected to end three years of impasse and fiscal instability in Washington that culminated in October with a partial government shutdown.
The U.S. central bank is due to meet on Dec. 17-18. Most economists polled by Reuters expected the Fed to start tapering its monthly bond buying programme from March, although some warmed to the possibility of an earlier move following recent strong economic data.
"The issue now is the Fed meeting next week, so anything that changes opinion about that could be important for gold," Macquarie analyst Matt Turner said.
"The reason gold rallies when they don't taper, even if you expect them to taper at the next meeting or the one after, is because each time they don't taper, it keeps open a possibility of QE (quantitative easing) continuing indefinitely, perhaps forever."
Any scaling back in extra stimulus would hurt gold, which has so far benefited from the resulting low interest rates, which are to the advantage of non-yielding assets.
Some saw further leg-room in the recent rally from a technical perspective.
"We suspect that given the better-looking chart patterns, the current rally in gold will likely continue until $1,290, where we see next resistance or until the Fed meeting, whichever comes first," INTL FCStone analyst Edward Meir said.
The heavy short-covering was borne out by data released last Friday from the Commodity Futures Trading Commission that showed bearish bets on gold were at a 7-1/2-year high, while long positions had been cut to a six-year low.
Other precious metals were moving broadly in line with gold. Silver was down 0.2 percent on the day at $20.30 per ounce, while platinum fell 0.1 percent to $1,382.10, and palladium lost 0.1 percent to $734.22.
Labour tensions flared in South Africa, the world's biggest producer of platinum.
The country's Association of Mineworkers and Construction Union has been given permission by a government mediator to call a strike over wages against world No. 3 platinum producer Lonmin , the union said on Tuesday.