By A. Ananthalakshmi
SINGAPORE (Reuters) - Gold inched up for a third session on Tuesday supported by a short-covering rally, even as investors remained on edge ahead of a policy decision from the Federal Reserve on its bullion-friendly stimulus measures.
Gold has lost over a quarter of its value this year after a 12-year bull market on fears that the Fed will scale back its $85 billion monthly bond purchases on the back of a strong economy.
Most economists believe the Fed will not begin tapering till March of next year, which could be prompting bullion investors to cover their positions ahead of the bank's two-day meeting that begins on Tuesday.
"I think this short-covering rally we have seen recently could be bigger if the Fed doesn't make a move tomorrow," said a Hong Kong-based precious metals trader.
The Fed will issue a statement on Wednesday after the meeting - the last one of the year.
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"Short positions are at multi-year highs and the outflows from exchange-traded funds are still high. Clearly the mood is still bearish," the trader said.
Spot gold had risen 0.3 percent to $1,241.80 an ounce by 0318 GMT.
Bearish bets by hedge funds and money managers in U.S. gold futures and options are close to a 7-1/2 year high, according to data from the Commodity Futures Trading Commission.
"Post the FOMC meeting, we are more favourable towards gold given recent COMEX data, which show that speculators still hold significant short positions on gold. The approaching year-end may lead to a covering of spec shorts, which is price supportive," HSBC analysts said in a note.
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 8.70 tonnes to 818.90 tonnes on Monday - its biggest outflow since Oct 21.
Holdings are at their lowest since January 2009 after more than 450 tonnes of outflows this year caused by investors channelling money towards risky assets such as equities.
(Reporting by A. Ananthalakshmi; Editing by Ed Davies and Joseph Radford)