By A. Ananthalakshmi
SINGAPORE (Reuters) - Gold eased on Monday to trade near three-week lows as a strong U.S. jobs growth reignited fears the Federal Reserve could soon start scaling back its stimulus, denting bullion's appeal as a hedge against inflation.
Indications that the U.S. economy was on a firmer footing than expected could prompt the central bank to start withdrawing support, its $85 billion monthly bond purchases, as early as next month. Gold has already lost nearly a fourth of its value this year amid expectations of a tapering.
"I think the Fed will still look for stronger evidence on the economic recovery," said Barnabas Gan, an analyst with OCBC Bank. "We are not exceptionally bullish on upcoming data. Markets will continue be on a data-watching mode."
Gan expects gold prices to rise to $1,320 an ounce by the end of 2013 and Fed's tapering to start early next year.
Spot gold fell 0.2 percent to $1,286.61 an ounce by 0317 GMT after losing nearly 2 percent in the previous session -- its biggest one-day fall in about a month triggered by the strong U.S. payrolls data.
U.S. employers took on 204,000 new employees last month, almost twice the number forecast by analysts and defying expectations that a partial U.S. government shutdown would hamper job growth.
Markets have been hoping that the 16-day government shutdown in early October and its impact on the economy will prevent the Fed from slowly withdrawing its bullion-friendly stimulus.
Gold had touched record highs of $1,920 an ounce in 2011, helped partly by stimulus measures from central banks around the world at the time.
Prices are expected to test support at $1,278, a break below which will lead to a further drop to $1,251.66, according to a 24-hour technical outlook by a Reuters analyst.
PHYSICAL DEMAND STILL WEAK
Gold's recent drop to below $1,300 has however failed to attract demand in Asia as buyers wait on the sidelines amid hopes for prices to weaken further.
Dealers in Hong Kong said demand has not picked up strongly and premiums remained stable at about $1.50 an ounce.
Prices have to fall towards $1,200 an ounce for demand to increase, one dealer said.
Premiums on the Shanghai Gold Exchange increased only slightly to about $5 an ounce from $4 on Friday.
(Editing by Himani Sarkar)