Gold posted a recovery yesterday based on increased physical demand from India and other technical buying, resulting in a climb out of the recent slump in prices.
The gains saw gold rise slightly above the 50-day moving average. And the Fed is set to release a policy statement on Wednesday, so investors are circling like hawks.
"With prices near the $1,720 support level, a sustained drop below this key level may elicit further short-term liquidations, in our view," said James Steel, HSBC's metals analyst.
But the decline might have already eased the pressure to sell by recent buyers who want to stave off additional losses.
Spot gold rose 0.3 percent to reach $1,725.10 per ounce on Monday afternoon. U.S. gold futures for December moved to $1,726.30, up $2.30 per ounce.
Last week, a temporary rally powered by the latest Federal Reserve stimulus program began to peter out, causing gold to drop sharply.
Most hedge funds and major speculators have exited gold dealings for now, likely in anticipation of another Fed move. COMEX gold futures dropped 8 percent in net longs, and U.S.-managed money in gold lost $2.4 bllion.
It remains to be seen how the Fed’s announcement this week will hit the currency markets and the general financial sector. New stimulus action is unlikely; at just the last meeting, the Fed announced QE3, stating that it would buy $40 billion of mortgage-secured bonds per month until the job market improves.
Meanwhile Asian demand for gold continues to increase. As a leading gold consumer, India is likely to drive demand up during the oncoming Hindu festive season, which will last until nearly the end of the year.