Gold edged lower on Tuesday, pressured by a stronger dollar, but anticipation of further monetary easing by the U.S. central bank is likely to keep sentiment bubbling.
The dollar rose more than half a percent against a basket of currencies, extending gains made in the previous session after Treasury Secretary Tim Geithner said the U.S. would not engage in dollar devaluation.
\"Gold is likely to continue the rally before the Federal Reserve meeting in early November. Unless the Fed announces quantitative easing to a huge extent, gold will retrace,\" said Zhu Yilin, general manager of the research and development department of Jingyi Futures in Shanghai.
\"It's all about buying the anticipation. Once the result is out, it's time to close positions.\"
U.S. industrial output shrank last month for the first time in more than a year, a sign the economy was in a slow-growth rut that appears certain to lead to more stimulus from the central bank.
Spot gold fell $2.6 to $1,365.85 an ounce by 0606 GMT, after moving in a tight range of less than $2 in the previous session.
U.S. gold futures for December delivery fell 0.4 percent to $1,366.4.
Technical analysis showed that gold could rise to $1,386.75, as the retracement is seen to have ended at $1,352.55, a low touched on Monday, according to Reuters market analyst Wang Tao.
For a graphic showing the 24-hour gold technical outlook:
\"The support level is at $1,350. Gold is likely to trade around the current level, until we know how much the stimulus is going to be,\" said a Hong Kong-based dealer.
He added that premiums were little changed from last week, at about 70 cents above London prices.
\"Demand from China is steady, as people still like to buy gold, betting on prices to rise to $1,400, $1,500 and even $1,600. The yuan appreciation also helps buying from China.\"
China has let its currency rise more swiftly in recent weeks after depegging it from the dollar in June, but a central bank spokesman said the country must ensure the yuan moves in a controllable way and not become over-adjusted in response to market forces.
Spot silver was down 0.4 percent at $24.26 an ounce, gaining 44 percent so far this year, leading gains in the precious metals complex.
Holdings in the iShares Silver Trust, the world's largest silver-backed exchange-traded fund, remained at a peak of 10,224.05 metric tons by Oct 18.
(Editing by Clarence Fernandez)