Gold inched up for a third session on Tuesday, supported by a short-covering rally, even though investors were nervous ahead of a Federal Reserve polciy decision on whether to begin tapering its bullion-friendly stimulus measures.

 

Gold has lost over a quarter of its value this year as fears that the Fed will scale back its $85 billion monthly bond purchases brought a 12-year bull market to an end.

 

Most economists believe the Fed will not begin tapering till March of next year, which could be prompting bullion investors to cover positions. The Fed will issue a statement on Wednesday,

at the end of its two-day meeting.

 

"I think this short-covering rally we have seen recently could be bigger if the Fed doesn't make a move tomorrow," said a Hong Kong-based precious metals trader."Short positions are at

multi-year highs and the outflows from exchange-traded funds are still high. Clearly the mood is still bearish."

 

Spot gold had risen 0.7 percent to $1,245.90 an ounce by 0756 GMT, while silver climbed nearly 1 percent. Bearish bets by hedge funds and money managers in U.S. gold

futures and options are close to a 7-1/2 year high, according to data from the Commodity Futures Trading Commission. 

 

"Post the FOMC meeting, we are more favourable towards gold given recent COMEX data, which show that speculators still hold significant short positions on gold. The approaching year-end

may lead to a covering of spec shorts, which is price supportive," HSBC analysts said in a note.

 

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 8.70 tonnes to 818.90 tonnes on Monday - its biggest outflow since Oct 21.

 

Holdings are at their lowest since January 2009 after more than 450 tonnes of outflows this year caused by investors channelling money towards risky assets such as equities.