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Gold holds ground ahead of Fed decision on stimulus

A gold Buddha statuette is seen inside a Luk Fook Jewellery shop in Yichang, Hubei province, May 20, 2012. REUTERS/China Daily/Files

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold edged higher on Wednesday after the previous day's slide, ahead of a key U.S. Federal Reserve decision on when to begin rolling back its massive monetary stimulus.

The Fed will issue a statement at the end of its two-day policy meeting on Wednesday at 1900 GMT, the last one in a year in which financial markets have been extremely sensitive to any comments on the outlook for the stimulus.

The $85 billion in monthly bond purchases have been a major supporter of global commodities such as gold.

Most economists polled by Reuters last week expected the tapering to begin only in March, but some say there is a still a chance of a stimulus cut immediately.

"A small-scale reduction may cause gold to fall to a range $30-$60 lower than its current range but knee-jerk reaction the likes of April and June is less likely," said Joyce Liu, an investment analyst at Phillip Futures Pte Ltd.

The markets are well-prepared for a small reduction in stimulus given the Fed's earlier comments, Liu said.

"The market is unlikely to head straight into another selling frenzy on fears of rising interest rates, but is still likely to pull funds out of speculative and leveraged instruments," she said.

Spot gold edged up 0.3 percent to $1,233.10 an ounce by 0252 GMT, after dropping 0.8 percent in the previous session.

The metal has lost about 26 percent of its value this year on growing concerns that an improving U.S. economy could prompt the Fed to scale back its bond purchases.

Fed Chairman Ben Bernanke had said in June the bank will begin slowing the pace of bond purchases later this year and would likely end the program by mid-2014.

However, he later said the Fed needs to see more evidence of economic growth for the tapering to begin, causing uncertainty in markets.

Data showed that investors continued to dump bullion for other assets. SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 2.08 tonnes to 816.82 tonnes on Tuesday - to fresh lows since January 2009.

Physical demand has been quiet as consumers await prices to drop further after the Fed meeting.

In China, the world's biggest bullion consumer, trading volumes on the Shanghai Gold Exchange were low.

Volumes for 99.99 percent purity gold have averaged 7 tonnes per day so far this week, compared to last week's daily average of 14 tonnes.

(Editing by Michael Perry and Muralikumar Anantharaman)