LONDON: Gold rose on Monday as European shares tumbled on 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 two-day meeting starting on Tuesday may be pivotal as it debates a potential overhaul of Fed guidance on rates. Investors will scrutinize the meeting for any clues on the timing of the first rate rise in more than eight years.
Gold benefited from low interest rates in the years after the credit crisis, as this encouraged investors to put money into the non-interest-bearing metal.
"Gold's losses on Friday were mostly due to the dollar's rally ... you see now a small pick-up in prices but I think they'll come under more pressure as the Fed's meeting comes into focus," ABN Amro analyst Georgette Boele said.
"I see gold going towards $1,200 by the end of September and the demand possibly coming from China and India over the next few weeks won't be enough to offset weakness on the investment front."
Spot gold fell to its lowest since January at $1,225.30 an ounce in earlier trade. It recovered to trade 0.7 percent higher on Monday at $1,236.60 by 1157 GMT.
The metal lost 3.2 percent in the previous week, the biggest weekly fall since late May as the dollar index posted its ninth straight weekly gain.
U.S. gold futures added $6.40 an ounce to reach $1,238.00.
The dollar was up 0.1 percent against a basket of leading currencies, while European shares fell after China's factory output grew at the weakest pace in nearly six years in August.
Lower equities and the unwinding of some short positions, which have built up significantly in the past few weeks, were seen as major support factors for the metal on Monday. Gold is usually considered an insurance against risk.
But overall 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 world's biggest buyer of gold and robust demand in the country could lend support to global prices.
In the world's second-largest gold user India, imports rose by 175 percent in August to $2.04 billion.
Silver was up 0.3 percent at $18.65 an ounce, having touched its lowest since June 2013 on Friday.
Platinum rose 0.7 percent to $1.370.25 an ounce, while palladium was up 1.3 percent at $844.50.
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