Gold settled higher Monday on softer global shares after disappointing data from China, but the metal was still near an eight-month low ahead of a Federal Reserve policy meeting that may signal an early interest rate increase.
The Fed meeting may be pivotal as it debates a potential overhaul of its guidance on interest rates and seeks to nail down a plan for quitting its extraordinarily easy monetary policy.
Investors will parse the U.S. central bank's words closely for any clues on the timing of the first U.S. rate rise in more than eight years. An announcement is expected on Wednesday at the end of the two-day meeting.
Any increase in interest rates would hurt non-interest-bearing gold and boost the dollar.
"The (Fed) meeting this week will dictate price action for the precious metals," said Samuel Laughlin, a metals dealer at MKS Group.
"Market consensus is for a June 2015 rate increase. However, any Fed comment hinting at an earlier rise would put further downward pressure on the metals."
for December delivery settled $3.60 higher at $1,235.10 an ounce.
Spot gold fell to $1,225.30 an ounce, its lowest since January, early on Monday before climbing 0.5 percent on balance to $1,234. Last week, gold fell 3 percent as the dollar index posted its ninth straight weekly gain.
Traders said the small gain could be due to safe-haven bids after Asian stocks fell to a five-week low due to a batch of weak data out of China.
Unwinding of some short positions, which have built up significantly in the past few weeks, could also be a factor in providing some support on Monday.
But investor sentiment towards gold remains weak, with hedge funds and money managers cutting bullish futures and option bets in gold to their lowest in nearly three months, according to data from the Commodity Futures Trading Commission on Friday.
Dollar strength and weak physical demand are also weighing on bullion. Asia - the top gold-consuming region - has not shown too much interest in buying the metal at lower prices as buyers expect further declines.
"There is still very little interest from China," said ANZ analyst Victor Thianpiriya. China is the biggest buyer of gold and robust buying in the country could lend support to global gold prices.
Thianpiriya said the sluggish demand was not, however, isolated to China.