Gold eased on Wednesday as a stock market rally curbed interest in the metal as an alternative investment, but moves were muted as traders awaited news later on whether the U.S. Federal Reserve will further taper its bond-buying programme.
The precious metal has retreated from the 10-week high it hit in Asian trading hours on Monday as stock markets recovered from losses linked to a sell-off in emerging markets.
Equities rallied further on Wednesday after Turkey stunned investors with a huge hike in interest rates, stirring hopes that drastic action would short-circuit a vicious cycle of selling in emerging markets and revive risk appetite.
Spot gold was down 0.1 percent at $1,255.00 an ounce at 1033 GMT, while U.S. gold futures for February delivery edged up by $4.30 an ounce to $1,255.10. Earlier this week it hit a peak of $1,278.01 as world stocks tumbled.
"You tend to have a knee-jerk reaction when equities go down, the VIX (volatility index) goes up, and people move into gold. Gold has benefited from that side of the equation," Natixis analyst Nic Brown said.
"With the action from a variety of central banks this week, equity markets have at least calmed down, and once we get through whatever (the Federal Reserve) is going to do later this evening, things should settle down."
In an statement at the end of their two-day policy meeting at 1900 GMT, Fed policymakers are expected to announce they will cut monthly purchases of Treasuries and mortgage-backed securities by $5 billion each, bringing the total of their monthly asset purchases to $65 billion.
Expectations that the Fed would rein in the extraordinary measures it put in place to boost the U.S. economy after the financial crisis were a major factor driving the 28 percent fall in gold prices last year.
Although a steady scaling back of the programme is now largely priced into the market, any sign that it is moving more quickly or slowly than expected could still affect gold prices.
CHINESE BUYING SLOWS
Chinese buying has slowed this week as traders and consumers wrap up for the Lunar New Year holiday, which starts on Jan. 31. Chinese markets will be closed until Feb. 6.
Premiums for 99.99 percent purity gold on the Shanghai Gold Exchange fell to about $5.50 an ounce on Wednesday from $7 in the previous session. They were as high as $20 in early January.
Trading volumes on the exchange on Wednesday were a little over