SINGAPORE: Gold added to small overnight gains on Tuesday as investors adjusted positions ahead of a key Federal Reserve policy meeting but they refrained from placing any big bets, awaiting clues on when the US central bank could raise interest rates.
Markets are eyeing the Fed's words closely for any clues on the timing of the first US rate hike in more than eight years. Any hike in interest rates would dim the appeal of gold, a non-interest bearing asset.
Some believe the Fed could signal that it may begin raising rates sooner than mid-2015, the current target for many economists.
The Fed will begin its two-day policy meet later in the day, with an announcement expected on Wednesday.
Spot gold inched up 0.3 percent to $1,236.14 an ounce by 0328 GMT. The metal hit an eight-month low of $1,225.30 in the previous session, before recovering to close up 0.4 percent on weaker equities.
"The price gain we are seeing is from some position covering ahead of the Fed statement," said one Singapore-based precious metals trader. "But it will face resistance at $1,240 and continue to be hurt by the stronger dollar."
The dollar has been strengthening recently on hopes for an earlier-than-expected rate hike, and any further gains could send gold lower.
The dollar index is hovering near a 14-month high after posting its ninth straight weekly gain on Friday.
"We remain biased to further downside (for gold prices), with the market appearing to be entering a period of sustained dollar strength, which will be a significant headwind for the gold price," ANZ analysts said in a note.
Investors were looking to physical demand is Asia to lend support. The recent drop in prices failed to attract consumers in a robust way, dealers said, though buying picked up slightly.
In top buyer China, daily trading volumes of 99.99 percent purity gold on the Shanghai Gold Exchange hit a two-week high on Monday. Premiums climbed to about $4-$5 an ounce, from $2-$3 last week.
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