Gold hovered near 10-month lows on Tuesday as the market braced for an increase in U.S. interest rates this month and anticipated more monetary tightening next year.
"We are closing in on the Federal Reserve meeting next week and the question is how many rate hikes they want to pencil in for next year," said Danske Bank's senior analyst Jens Pederson.
He said there were indications that inflation could rise due to more spending under U.S. President-elect Donald Trump's policies, spurring the Fed to increase rates.
Spot gold was down 0.18 percent at $1,168.08 an ounce by 2:22 p.m. EST (1922 GMT), up slightly from Monday's 10-month low at $1,157.
U.S. gold futures settled down $6.4, or 0.54 percent, at $1,170.1 per ounce.
Gold prices are highly sensitive to interest rates - particularly U.S. rates - as higher rates lift the opportunity cost of holding non-yielding assets such as gold and boost the dollar, in which bullion is priced.
Recent upbeat U.S. data, including non-farm payrolls and factory and services sector activity, point to a recovery in the world's biggest economy, clearing the way for the Federal Reserve to raise interest rates next week.
Interest rate futures imply traders see a 93 percent chance of the Fed raising rates by a quarter point to 0.50-0.75 percent next week, CME Group's FedWatch showed.
Rising bond yields and a flight to stock markets have also dampened the appeal of gold, which pays no interest.
However, Commerzbank said it expected 2016's gold rally to resume next year after its run fueled by investment demand lost steam in the last quarter.
"The headwind from U.S. dollar appreciation and the rise of bond yields should abate and investment demand should pick up again also given the numerous risk factors," the bank said.
Holdings of the SPDR Gold Trust , the world's largest gold-backed ETF fell 0.04 percent to 869.90 tonnes on Monday.
Among other precious metals, silver was down 0.08 percent at $16.72 per ounce and platinum was up 0.1 percent at $935, after touching its highest since Nov. 11 at $952.
"Platinum continues to look good and may finally be trying to make a stride to the upside," said Miguel Perez-Santalla, vice president of Heraeus Metal Management in New York.