Gold settled higher on Monday after a retreat in the dollar helped prices recover from early losses, though uncertainty over when the Federal Reserve will start trimming its extraordinary stimulus measures limited gains.
While no major policy change is expected when Fed officials meet on Tuesday and Wednesday, most recent U.S. economic data suggests that the beginning of the end of its massive bond-buying program will come sooner rather than later.
Spot gold was last up 0.4 percent to $1,242 an ounce, while U.S. gold futures for February delivery settled $9.80 higher at $1,244.40 an ounce.
"There is going to be some positioning by speculative investors ahead of Wednesday's announcement, so we might see some volatility (and) choppy trading,'' said Mitsubishi analyst Jonathan Butler.
Expectations that the Fed will taper stimulus have already knocked gold prices 25 percent this year—their biggest annual drop in 32 years. Concerns that that retreat may have been overdone led to a flurry of short-covering last week.
Chart: Precious Metals
Data released on Friday showed hedge funds and money managers raised bullish bets in U.S. gold futures and options by 6,675 lots to 33,449 contracts in the week to Tuesday.
Trading is expected to remain relatively quiet this week ahead of the Fed, traders said.
"It is unlikely the Fed will surprise the market with an outright reduction in its monthly asset purchases, but any hawkish hint and the need to start reducing QE3 would send bullion lower,'' VTB Capital said in a note on Monday.
The dollar index eased 0.2 percent on Monday as traders took to the sidelines ahead of the Fed, and as the euro benefited from euro zone data that showed a pick-up in business activity.
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