Gold eased on Tuesday but wasn't far from two-month highs hit in the previous session, with investors awaiting minutes from the U.S. central bank's July policy meeting for clues on when it will begin scaling back its commodities-friendly stimulus steps.
The precious metal has risen about 6.5 percent over the last 10 sessions, also supported by signs of increasing physical demand from China and India, and a possible halt in big outflows from exchange-traded funds (ETFs).
Traders said they expected a further drop in prices as gold losses its momentum that was prompted by technical buying once prices crossed $1,350 last week.
"We need a correction. The rally looks a bit overdone to me," said one Hong Kong-based precious metals trader. "The correlation with the dollar and U.S. yields have not been working at all since last week."
U.S. benchmark bond yields hit a two-year high near 3 percent on Monday and major U.S. stock indexes fell for a fourth straight session as markets braced for the U.S. Federal Reserve to start withdrawing its $85 billion monthly asset purchases.
The yield on benchmark 10-year Treasury notes is up sharply from 1.60 percent in early May, before the Fed started signalling its intentions to pare back its quantitative easing if the economy continued to strengthen.
Spot gold shed 0.1 percent to $1,363.90 an ounce by 0355 GMT.
The Fed, which is due to release the minutes of its July policy meeting on Wednesday, had indicated earlier that it could start tapering the bond purchases if the labour and housing markets continued to recover.
The withdrawal of the stimulus would be big blow to gold which hit an all-time in 2011 on the back of easy money from central banks around the world.
It has lost nearly a fifth of its value this year on stimulus worries and outflows from bullion-backed ETFs.
"Once September rolls around, gold's upside becomes more suspect and we could be in store for a much more concerted decline as we think that the Fed will indeed deliver its first tapering instalment," INTL FCStone analyst Edward Meir said.
Buying from China was quiet today, traders said, as dealers awaited more clarity on the Fed stimulus. Shanghai gold futures fell on Tuesday after a three-session rise.
Indian traders said they will start importing gold again over the next week or so after the central bank clarified a new rule that brought the flow of the precious metal into the world's top gold consumer to a standstill at the end of July.
Data from the U.S. Mint showed that August sales of American Eagle gold bullion coins stood at just 3,000 ounces as of Monday, far lower than the 39,000 ounces for the whole of August last year and the monthly average of almost 100,000 ounces for the first seven months of this year.
Precious metals prices 0355 GMT
Metal Last Change Pct chg YTD pct chg Volume
Spot Gold 1363.90 -1.58 -0.12 -18.55
Spot Silver 23.04 -0.08 -0.35 -23.91
Spot Platinum 1508.00 5.70 +0.38 -1.76
Spot Palladium 748.50 1.00 +0.13 8.16
COMEX GOLD DEC3 1363.80 -1.90 -0.14 -18.62 12519
COMEX SILVER SEP3 23.06 -0.11 -0.46 -23.91 2825
COMEX gold and silver contracts show the most active months