REUTERS - Gold rose on Monday, after touching a two-week low in the prior session, as the dollar softened, but caution ahead of the U.S. Federal Reserve's monetary policy decision kept a lid on prices.
The Fed is set for a lively debate when it meets on Sept. 20-21 and could give a clear signal of an interest rate rise to come even if it follows market expectations for a pause this month. Economists polled by Reuters are increasingly expecting a rate hike this year, but only in December.
"Gold has seesawed for the last week purely because of the fact that market watchers are waiting for the Fed meeting later this week," said OCBC Bank analyst Barnabas Gan. "Do expect gold prices to be extremely volatile towards the meeting."
Higher interest rates increase the opportunity cost of holding non-interest yielding gold.
Spot gold was up 0.4 percent at $1,315.60 an ounce by 0453 GMT, not far from a low of $1,306.26 hit on Friday, the weakest since Sept. 1. U.S. gold futures rose 0.7 percent to $1,318.90 an ounce.
A softer dollar, which was down 0.2 percent against a basket of currencies, underpinned gold by making the metal cheaper for holders of other currencies.
The return of Chinese investors after the Mid-Autumn Festival break also underpinned prices, traders said.
"They (China) have been out of the market for two days and obviously liked these levels and are buying. Some stops were triggered on the upside," a Hong Kong-based trader said.
"People are quite hawkish on the Fed meeting. If there is any buying, it must be in arbitrage as Shanghai premiums were firm. When Europe wakes up it might be a different story and there could be selling in the rally."
The market is also waiting for the outcome of a Bank of Japan policy meeting, on Sept 20-21, for trading cues.
Spot gold may edge up to $1,319, as it has cleared a resistance at $1,313, a Reuters technical analyst said.
Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 1.11 percent to 942.61 tonnes on Friday.
Hedge funds and money managers lowered their net long positions in COMEX gold contracts in the week to Sept. 13, U.S. Commodity Futures Trading Commission data showed.
Among other precious metals, spot silver rose over 2 percent to as much as $19.17 per ounce, while platinum gained over 1 percent to $1,027.80, off Friday's 2-1/2-month low of $1,005. Palladium was up 1 percent at $677.72.
(Additional reporting by Swati Verma in Bengaluru, reporting by Nallur Sethuraman; Editing by Himani Sarkar)