Gold steady after two-day gains, but taper worries linger

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold was steady on Tuesday after gaining 1.3 percent over the past two days, but trading volumes were thin as investors turned their attention to a U.S. Federal Reserve policy meeting next week.

Volumes on the futures market and the physical market were thin as investors waited on the sidelines for a clearer outlook on the U.S. central bank's commodities-friendly monetary stimulus measures.

Spot gold had eased 0.1 percent to $1,239.39 an ounce by 0319 GMT. It had gained over the last two sessions on short-covering, technical-selling and some fund-buying.

"The short-term bullishness is unlikely to last through next week as speculators are likely to trade with more caution closer to the last FOMC meeting of the year," said Joyce Liu, investment analyst at Phillip Futures Pte Ltd, referring to the Fed's Federal Open Market Committee.

Markets worry the Fed could decide to begin cutting its $85 billion monthly in bond purchases at the December 17-18 meeting due to recent strong economic data. The stimulus has supported gold prices as it boosts the metal's inflation-hedge appeal.

Gold has lost about a fourth of its value this year on fears the bond purchases would be scaled back.

In comments made on Monday, two Fed officials also supported market views that the bank was close to tapering.

St. Louis Fed President James Bullard said the Fed could slightly reduce its monthly bond purchases this month in reaction to signs of an improved labour market.

Dallas Fed President Richard Fisher said he will urge his colleagues at the Fed's meeting next week to begin trimming their bond-buying program immediately.

DOLLAR WEAKNESS

The euro stayed well-bid on Tuesday, scaling a fresh five-year high on the yen and a six-week peak against the dollar as expectations for further stimulus from the European Central Bank continued to fade.

A weaker greenback could support gold by making the dollar-denominated metal cheaper for holders of other currencies.

"In the current environment, it appears further USD weakness is likely. This should provide some support for bullion," HSBC analysts said in a note.

"Beyond that, we believe gold prices are more likely to stay in a tight trading range in the near-term, barring any major economic surprises."

(Editing by Joseph Radford and Muralikumar Anantharaman)