Gold inches up as Fed seen to stay accommodative

Mahdi al-Mehri, 28, a Saudi jeweller, displays gold bangle in a jewellery shop at the surrounding area of the Grand Mosque during the annual haj pilgrimage in the holy city of Mecca October 20, 2012.

SINGAPORE (Reuters) - Gold inched up on Monday as a drop in the U.S. unemployment rate did little to dampen expectations that the Federal Reserve will maintain easy monetary policy when it meets later this week.

Investors are watching progress in the U.S. fiscal talks and potential political uproar in Italy, which could jolt the market where liquidity is starting to thin as traders close books before the end of the year.

The slow improvement in the U.S. job market and prospects for more cash printing by the Federal Reserve kept sentiment buoyant in gold, which has risen about 9 percent this year, mostly on the Fed's stimulus measures.

Investors await a U.S. Federal Reserve policy meeting on Tuesday and Wednesday, after which the central bank is expected to announce fresh bond purchases of $45 billion a month to replace Operation Twist, the Fed's program of buying longer-dated bonds with sale proceeds from shorter date holdings, due to expire at the end of the year.

"Market expectation is that there could be more quantitative easing towards the end of the month, and this will be supportive of gold," said Lynette Tan, an analyst at Philip Futures in Singapore.

But Tan said gold was likely to remain trapped in a range between $1,680 and $1,750 an ounce as many investors have moved to the sidelines watching the progress of talks in Washington to avert the "fiscal cliff", $600 billion worth of tax hikes and spending cuts due to kick off next year that is feared would trigger another recession.

Spot gold edged up 0.2 percent to $1,707.80 an ounce by 0750 GMT, standing above the 100-day moving average at $1,702.64. U.S. gold was also up 0.2 percent, to $1,709.

"If the Fed shows reluctance to continue purchases of mortgage-backed securities on improving economic outlook, gold will sell off, but I'd say that's maybe a 10 percent chance," said a Singapore-based trader.

Hedge fund and money managers cut their bullish bets on U.S. gold last week to the lowest level since late August, and also reduced silver longs, data from the U.S. Commodity Futures Trading Commission showed.

But some investors continued to pile into gold-backed exchange-traded funds. Holdings of gold ETFs hit a record high of 76.129 million ounces on December 7, despite stagnant gold prices in recent weeks.

Weaker-than-expected exports growth in China offset the optimism on the recovery of the world's second-large economy brought a set of upbeat data over the weekend, signalling slow recovery.

But improving vehicle market in China is likely to provide some help for platinum group metals, used in producing exhaust-reducing autocatalysts.

Spot platinum hit a more than one-week high of $1,612.50, and spot palladium was little changed at $692.60, close to a near three-month high of $698.50 hit in the previous session.

(Editing by Miral Fahmy)