Gold inched up on Tuesday as bargain-hunters moved in after prices touched their lowest in 10 months the session before, but a possible U.S. rate hike as early as next week capped gains.
"With a Fed rate hike approaching, the whole market is just waiting for that," said Jiang Shu, chief analyst at Shandong Gold Group.
Shu said gold was seeing some support from buying by Chinese jewellery makers ahead of an early Spring festival next year.
Spot gold was down 0.2 percent at $1,167.80 an ounce by 3:03 p.m. EDT. It touched $1,157 an ounce on Monday, its lowest since Feb. 5.
U.S. gold futures, which also marked a 10-month low in the prior session, settled for February delivery $1,170.10 per ounce.
"The expected increase in key interest rates is largely taken into account in current prices. However, we do not exclude a drop of the gold price to $1,150 per ounce," Heraeus Metals wrote in a note.
Bullion is highly sensitive to rising interest rates, which make the non-yielding asset less attractive while boosting the dollar, in which it is priced.
U.S. services sector activity hit a one-year high in November, with a surge in production boosting hiring, further evidence of strength in the economy that clears the way for the Federal Reserve to raise interest rates next week.
Interest rates futures implied traders saw a 93-percent chance the Fed would raise rates by a quarter point to 0.50-0.75 percent next week, CME Group's FedWatch showed.
Fed officials cautioned on Monday that the incoming Trump administration's economic plans should not be cast as if the economy is in crisis, but instead be designed to help the economy's long-run prospects.
Fed officials worry there is risk that overly aggressive fiscal, tax and other changes could become inflationary given the economy's current strength. That could force the Fed into more rapid interest rate increases and possibly raise the risk of recession.
"Gold will likely remain under pressure going into year-end," Edward Meir, an analyst with INTL FCStone, said in a note.
He pointed to the combined impact of higher rates, a stronger dollar and buoyant U.S. equity markets, coupled with significant exchange-traded fund (ETF) outflows and weaker Indian physical demand.
Holdings of the SPDR Gold Trust, the world's largest gold-backed ETF fell 0.09 percent to 869.90 tonnes on Monday.
Palladium added 0.2 percent to $744.55 an ounce.