Gold held near $1,710 an ounce on Tuesday, little changed from the previous session, ahead of a US Federal Reserve meeting where policymakers are expected to announce more potentially bullion-supportive stimulus measures.
Many economists expect the Fed to announce monthly bond purchases of $45 billion after its meeting on Tuesday and Wednesday.
Gold benefits from an easy monetary policy as investors fear that repeated cash printing will damage the value of currencies, prompting them to seek safety in hard assets such as bullion.
Spot gold was down 0.1 percent at $1,709.50 an ounce at 13:19 SA time, after hitting a one-week high of $1,717.20 in the previous session. US gold dropped 0.2 percent to $1,711.20 an ounce.
Gold has risen more than 9 percent so far this year amid monetary easing policies by the world's central banks, especially the Fed and European Central Bank.
“If the Fed comes out with $45 billion of bond purchases, it could be the spark we need for another gold rally,” Mitsubishi analyst Matthew Turner analysts.
“Previous episodes of quantitative easing (QE) have seen a gold rally. The policy should increase inflationary expectations, and gold acts as a hedge against inflation.”
“If there were no new stimulus, I think the gold price would fall quite sharply,” he added. “If they announce, say $20 billion, it could have a neutral effect. It all depends on how much the market is pricing in.”
On other financial markets, European shares rose in mid-morning trade and the euro hit a session high against the dollar after data showed German investor confidence unexpectedly rose in December after a sharp fall in the previous month.
German Bund futures also retreated after the data, while Italian government bond yields reversed an early rise, nudging lower on the day as concern at the long-term impact of Prime Minister Mario Monti's early resignation ebbed.
HONG KONG GOLD PREMIUMS HIT 5-MONTH HIGH
Gold premiums in Hong Kong rose to their highest in about five months on Tuesday as Chinese banks stocked up on bullion to avoid a supply crunch when refineries close shop for the year-end holidays.
“Chinese buying has been picking up,” Dick Poon, general manager of Heraeus Metals Hong Kong Limited, said. “The banks want to keep some inventory and prepare for the holiday demand around the Lunar New Year.”
China is currently vying with India as the world's number one gold consumer, after Indian demand fell 24 percent in the first three quarters of the year.
South Africa's gold output nearly halved in October from the same period last year, highlighting the impact of a wave of wildcat strikes that swept the sector, data showed on Tuesday.
Both platinum and palladium hit multi-month highs in the previous session, encouraged by strength in base metals and a bright outlook for the Chinese economy.
“Since the beginning of the year, a total of 17.5 million cars, trucks and buses have been sold in China, 4 percent up on last year,” Commerzbank said in a note. “It is estimated that next year will at least see car sales growing by a further 10 percent or so.”
“Platinum and palladium are used to manufacture autocatalysts and should profit from the increased demand in China,” it said. “The platinum price has also found support from ETF investors in recent weeks.”
Spot platinum was up 0.1 percent at $1,619.30, off Monday's peak of $1,625.00, its highest since mid-October.
Spot palladium, which hit a three-month high of $702.50 on Monday, was down 0.2 percent at $695.50. The metal is in overbought territory after rising around 15 percent in the last month, outstripping gains in other precious metals.
Silver was down 0.3 percent at $33.08 an ounce. - Reuters