By A. Ananthalakshmi
SINGAPORE (Reuters) - Gold edged up on Tuesday after dropping for three sessions, but gains were limited as uncertainty over when the U.S. Federal Reserve would begin tapering its stimulus dented bullion's appeal as a hedge against inflation.
The Fed shocked markets last week by deciding not to reduce its asset purchases from the current $85-billion monthly pace, contrary to expectations for a $10 billion cut from September in its bond buying -- which is tantamount to printing money.
New York Fed President William Dudley however said on Monday that the U.S. central bank should still be able to reduce its support for the economy later this year, while St. Louis Fed President James Bullard earlier said that stimulus could be scaled back in October depending on economic data.
"As long as this backdrop remains, we can expect gold prices to remain volatile," said OCBC Investment Research's Lim Siyi, who tracks exchange-traded funds.
"Most investors have a wait and see attitude right now because it is very hard to predict the upside, especially with all the speculative positions."
Spot gold rose 0.4 percent to $1,326.36 an ounce by 0252 GMT, while silver gained 1 percent. Gold shed 3.2 percent over the past three sessions.
Worries that central banks' money-printing to buy assets will stoke inflation have been a key driver in boosting gold, which rallied to an 11-month high last October after the Fed announced its third round of aggressive economic stimulus.
Speculators slashed bullish bets in futures and options of U.S. gold and silver markets, a weekly report by the Commodity Futures Trading Commission showed on Friday.
PHYSICAL DEMAND STILL WEAK
Gold premiums across Asia remained weak due to lacklustre physical demand ahead of what is typically a strong buying period for top consumers India and China, which are headed into a wedding and festival season.
But the Fed uncertainty and India's attempt to cut gold imports as it tries to wrestle down its ballooning current account deficit are keeping buyers at bay.
"Physical demand is not strong enough to support prices," Lim said.
Gold importers in India are hoping stocks lying at airports would get customs clearance by Tuesday, following a meeting with government officials last week, before they ship more for exporters ahead of the Christmas season.
Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, have been falling again after a brief burst of inflows in August.
(Editing by Himani Sarkar)