Gold settled modestly lower on Monday, retreating from the 10-week highs it hit overnight on the back of weakness in global stocks, as traders cashed in gains in the metal ahead of a key Federal Reserve meeting this week.
Expectations that the Fed could trim monetary stimulus further from the $10 billion-a-month reduction to its bond-buying program late last year served to lift the dollar, while safe-haven currencies such as the yen were in demand as a sell off in emerging markets continued.
Spot gold was last at $1,260 an ounce, off 0.7 percent, having hit its highest since mid-November overnight at $1,278.01 an ounce. U.S. gold futures for February delivery settled 90 cents lower at $1,263.40 an ounce.
The metal is struggling to maintain last week's gains ahead of the Fed's two-day policy meeting, which starts on Tuesday.
"There is opportunistic selling and some profit-taking'' ahead of the Fed meeting, VTB Capital analyst Andrey Kryuchenkov said.
"I don't expect much upside from here, and prefer a small-scale correction as Asian flows slow ahead of the Lunar New Year.''
(Read more: Gold's 'safety' bid may be capped around $1,300)
A 2.3 percent drop in world stocks last week helped to push gold higher for a fifth straight week—its longest run of weekly gains since mid-2012.
Stock markets fell further on Monday as concerns about China's economic slowdown and its shadow banking sector, coupled with expectations the Fed would scale back its bond buying, piled pressure on emerging markets dependent on external financing.
In the longer term, any recovery in equities would be likely to curb gains in the precious metal, Mitsubishi analyst Jonathan Butler said.
"This setback in the equities market and this risk-off mentality overall isn't going to endure in the medium term,'' he said. "Once we see more positive U.S. data and positive earnings, that will weigh on gold once again.''
(Read more: China becomes top gold consumer in 2013)
"It seems a breakout to the $1,300-$1,330 mark is on hold for now, but it depends on what happens with the Fed this week,'' Butler added.
China's net gold imports from Hong Kong rose 24 percent in December from the previous month, the Hong Kong Census and Statistics Department said on Monday, bringing purchases for 2013 to a record 1,158 tons.
Net gold flows into China, the world's biggest gold consumer, climbed to 94.847 tons in December from 76.393 tons in November, it said.