Gold staged a modest rebound on Tuesday after falling more than 1 percent in the previous session, but the precious metal was still heading for its biggest annual decline since 1981 because investors shifted money to equities.

A drop in exchange-traded funds holdings shows investors lost faith in bullion as a hedge against inflation and an alternative investment after the US Federal Reserve announced plans to trim in its big monthly bond purchases.

Gold added $2.80 an ounce to $1,198.80 by 0255 GMT, but was set to end this year down around 28 percent. Prices were sharply lower than all-time highs above $1,900 in 2011, when a worsening debt crisis in Europe sparked buying.

Bullion tumbled to a six-month low around $1,185 on Decemebr 20 after the Fed's decision to scale back its bond-buying stimulus prompted a sell-off.

"For the next quarter, precious metals as a whole still look weak. We might see gold, especially during the first quarter, test the lows of this year, which are not far away," said Brian Lan, managing director of GoldSilver Central Pte Ltd in Singapore
    
"I think the next level to test is $1,088. The US economy will look to recover and the stock market is also looking much more attractive at this moment," he said.

US gold fell 0.47 percent to $1,198.20 an ounce.  
     
Global stocks are closing out 2013 sitting on sizable gains courtesy of super-easy monetary policies and an improving economic outlook, though some emerging markets have less to crow about as funds return to rich-world assets.

The Fed provided a concrete example of that optimism when it started curtailing its unprecedented monetary stimulus, based on the strength of recent signals from the economy.

As investors abandoned gold, SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 0.37 percent to 798.22 tonnes on Monday from 801.22 tonnes on Friday.
 
"We don't have much to add to our short-term view on gold," Edward Meir, an analyst at INTL FC Stone, said in a report. "The complex will likely remain under pressure going into the New Year and we think it's just a matter of several more trading days before the June 2013 low of $1,179 is taken out," he added, referring to US gold futures. - Reuters