Gold fell on Thursday as stock markets gained for a third straight day, but the metal held in a tight range ahead of next week's Federal Open Market Committee meeting when the US central bank is widely expected to raise interest rates. Meanwhile, palladium touched a fresh record high, trading at a premium to bullion, buoyed by a sustained deficit and hopes of fresh demand from the auto sector.
Spot gold eased 0.2 percent to $1,242.79 per ounce at 1256 GMT, but was trapped in a $6 range, while US gold futures were down 0.2 percent at $1,247.10 per ounce. "Next week we have the FOMC rate decision, and it has been pretty much priced in that we are going to have a rise. But if we see the Fed hold off that rate hike in the light of rising inflation and other macroeconomic concerns, gold could be boosted by that," said Mitsubishi analyst Jonathan Butler.
Investors' focus will be on how much further the US Federal Reserve might lift rates next year. "We would have a bit more guidance on that next week when the FOMC meets. But it does seem that the Fed is adjusting from more aggressive rate hikes, three or more, to a somewhat toned down approach," Butler said.
Higher rates make non-yielding bullion less attractive, and tend to boost the dollar, in which gold is priced, making it more expensive for holders of other currencies. Meanwhile, equity markets rallied on signs of easing trade tensions between the United States and China.
"With equities rebounding this week, gold has fallen slightly out of favour as traders unwound their safe haven bets," said Fawad Razaqzada, an analyst with Forex.com. Gold's direction in the near term would be determined by moves in the greenback, which could be pressured if the Fed takes a more cautious approach, analysts said.
"Gold's recent breakout above the $1,240 resistance means the path of least resistance is still to the upside and it should get a lift if the dollar were to fall on the back of a dovish Fed," Razaqzada said. Meanwhile, gold's reaction to the European Central Bank's decision to formally end its 2.6 trillion euro ($2.95 trillion) bond purchase scheme was muted.
Attention now turns to ECB President Mario Draghi's news conference at 1330 GMT. Among other precious metals, spot palladium was down 0.5 percent at $1,255.90 per ounce, having touched a record high of $1,269.25 earlier in the session.
The autocatalyst metal rose strongly on news that China would be reducing tariffs on US imported autos, raising hopes that the sector would be boosted by additional demand, analysts at ANZ said in a note. Silver was down 0.2 percent at $14.71 per ounce, while platinum was steady at $798.40.