Gold recovered slightly on Wednesday from the previous session's four-week trough but looked likely to test further lows on fresh uncertainty over the fate of the U.S. central bank's commodities-friendly stimulus measures.
The Federal Reserve should keep monetary policy ultra-easy given the economy's tepid growth and an uncertain outlook for jobs growth, two senior officials said on Tuesday. However, one of them said he would not rule out tapering in December.
The bank's $85-billion monthly bond purchases has in recent years been a key driver for gold which is seen as an inflation-hedge.
Improving economic data - like the strong U.S. nonfarm payroll report last week - has raised fears the Fed could soon begin tapering the purchases. Gold prices have fallen around 25 percent this year.
"The sharp drop over the last few days is mostly a reaction to the jobs data last week. Before the report, markets were expecting a tapering only next year but after the data everyone started thinking it could be in December," said one Hong Kong-based precious metals trader.
"If the tapering is going to be in December, prices are going to be much lower than current levels," he said.
Spot gold had gained 0.2 percent to $1,270.26 an ounce by 0151 GMT, after falling as much as 1.7 percent in the previous session to $1,260.89 - its lowest since October 15.
Silver was up 0.1 percent after dropping 3 percent in the previous session to a four-week low.
Charts point to a further drop in gold prices and physical demand is weak - indications that prices are set to fall further.
"The U.S. dollar is stronger and stock markets are quite steady. If physical demand doesn't pick up, then gold prices will go lower," said Yuichi Ikemizu, branch manager for Standard Bank in Tokyo.
Dealers said physical demand has failed to pick up due to weaker regional currencies in Asia.
Spot gold is expected to fall further into a support zone of $1,249-$1,251.66 per ounce, and a break below $1,249 will open the way towards $1,223, according to Reuters technical analyst Wang Tao.