Gold edged lower on Tuesday as the dollar recovered, retreating from a five-week high as investors started to factor in expectations that the U.S. Federal Reserve will maintain its stimulus measures well into early 2014.

The Fed begins a two-day policy meeting on Tuesday in which it is widely expected to confirm it will continue buying bonds at the rate of $85 billion a month.

Many economists believe the Fed could push tapering to early next year.

Spot gold was down 0.5 percent to $1,344.64 an ounce by 1104 GMT. It hit its highest since Sept. 20 at $1,361.60 in the previous session, supported by weaker than expected U.S. data reinforcing the view that the U.S. economy is not yet strong enough for the Fed to start tapering monetary stimulus.

U.S. gold futures for December delivery were down by $7.30 an ounce at $1,345.10.

"We had decent gains yesterday and a bit of profit-taking was to be expected," VTB Capital analyst Andrey Kryuchenkov said.

"The main focus remains on the Fed and the market seems to have factored in the central bank will not change its current accommodative stance."

The dollar gained slightly against a basket of currencies, drawing some support from a stabilisation in U.S. Treasury yields above 2.5 percent.

Returns from U.S. bonds are closely watched by the gold market because the metal pays no interest.

Gold prices have fallen nearly 20 percent this year in the expectation of imminent tapering by the Fed, but a budget battle in Washington and a string of weak economic data have raised questions over whether it will scale back monetary stimulus, giving bullion a boost. The metal has gained 8 percent over the past two weeks.

"The market will continue to be sensitive to any U.S. data and bullion's trade will continue to be strongly correlated to the dollar index," Kryuchenkov said.

PHYSICAL DEMAND

Though a prolonged period of easy money could support gold, physical demand could take a hit beacsue of the higher prices. Demand in Asia has been subdued for a while.

"We continue to view gold as precariously placed, while physical demand for the metal remains soft," ANZ analysts said in a note.

"We viewed the metal as overbought above $1,340 on the back of weak demand from China and continued ETF selling."

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, remained unchanged at 872.02 tonnes on Monday after falling 4.5 tonnes on Friday.

Spot silver fell 0.5 percent to $22.34 an ounce.

Spot platinum was down 0.8 percent at $1,458.60 an ounce, having risen to a five-week high of $1,469.50 in the previous session on prospects that strikes in South Africa could curb supply.

Spot palladium was down 0.5 percent at $739.72 an ounce. – Reuters