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Gold ends near $1,251 as dollar, equities rebound

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Gold settled lower on Tuesday, extending the previous session's 1 percent drop, as global equities rebounded from their lowest in over a month and emerging markets stabilized after three days of intense selling.

Moves were muted, however, ahead of the start of a two-day meeting by the Federal Reserve, which is expected to continue tightening monetary policy.

Policymakers will almost certainly make a $10 billion cut to the Fed's $75 billion monthly bond-buying program, analysts said. Expectations that the program would be cut were a major factor in gold's 28 percent price crash last year.

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Spot gold was last down 0.5 percent to $1,251 an ounce, while U.S. gold futures for February delivery settled 1 percent lower at $1,250.80 an ounce. The metal hit a 10-week high of $1,278.01 in Asian trading hours on Monday.

"We are looking more and more at the relationship between the major international stock markets and gold. That seems to be what's shaping the movement of prices," said Peter Fertig, a consultant at Quantitative Commodity Research.

"Last year, institutional investors sold gold significantly, because they expected higher returns on equities," he said. "The precious metals will only profit as an investment vehicle if there is now a reallocation out of stock markets into commodities."

Investors have been shaken this week by a huge sell-off in so-called risk assets due to jitters about the withdrawal of U.S. monetary stimulus, slowing Chinese growth and country-specific political tensions.

(Read more: India saves the day...Now it's Turkey's turn)

Major currencies marked time ahead of the end of the Fed's policy meeting on Wednesday, with the dollar edging up 0.1 percent against a basket of major currencies.

Emerging markets steadied after sharp falls as investors waited to see whether Turkey, one of the epicenters of the rout, would raise interest rates to defend its battered lira. European shares rose 0.7 percent.

Traders say demand for physical bullion from No. 1 gold consumer China is also likely to wind down for the Lunar New Year holiday later this week.

"At the moment (the rally) seems like it has run out of steam," Heraeus trader Alexander Zumpfe said. "Physical demand is slowing down somewhat with China reaching its Lunar New Year, and it seems like they have done their physical buying—the premium on the Shanghai Gold Exchange also decreased."

Premiums for 99.99 percent purity gold on the SGE slipped to $7 on Tuesday from $10 in the previous session.

Data from the International Monetary Fund showed on Tuesday that Kazakhstan lifted its gold reserves by 2.39 tons in December, while Belarus, Ukraine and Azerbaijan all also added to reserves.

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—By Reuters

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