By Clara Denina
LONDON (Reuters) - Gold rose on 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 two-day meeting starting on Tuesday may be pivotal as it debates a potential overhaul of Fed guidance on rates and investors will be watching closely for any clues on the timing of the first rise in more than eight years.
Gold benefited from low interest rates in the years after the credit crisis, with investors encouraged to put money into the non-interest-bearing metal.
"It is possible that the Fed will say something more hawkish and shift the language in a way that it becomes almost certain that interest rates will start to increase early next year," Macquarie analyst Matthew Turner said.
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"But there is still a bit of uncertainty as the Fed has always talked about keeping rates lower for longer. It's worth bearing in mind that this time last year everyone was expecting the Fed to start tapering and it didn't, and gold did get a boost. This year, however, the economic data seems more uniformly good."
Spot gold fell to its lowest since January at $1,225.30 an ounce in earlier trade, recovering to $1,233.40 by 1414 GMT, up 0.4 percent.
The metal lost 3.2 percent in the previous week for the biggest weekly fall since late May as the dollar index posted its ninth straight weekly gain.
U.S. gold futures added $3.70 an ounce to reach $1,235.40.
Global shares fell after China's factory output grew at its weakest pace in nearly six years in August.
The dollar was unchanged against a basket of leading currencies, clawing back earlier gains after data showed U.S. manufacturing output fell for the first time in seven months in August. [MKTS/GLOB]
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.
"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," ABN Amro analyst Georgette Boele said.
Dealers in Asia said some buying interest could return if the metal continues to fall.
In India, the world's second-largest gold user behind China, imports rose by 175 percent in August to $2.04 billion.
Silver was down 0.2 percent at $18.56 an ounce, having touched its lowest since June 2013 on Friday.
Platinum rose 0.3 percent to $1.364.00 an ounce, while palladium was down 0.1 percent at $833.25.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Keiron Henderson and David Goodman)
