Gold prices firmed for a third session on Monday on expectations the Federal Reserve will further stimulate monetary policy when it meets later this week, and as the dollar edged lower versus the euro.

Investors are awaiting the outcome of a Fed meeting on Tuesday and Wednesday, after which the U.S. central bank is expected to announce fresh bond purchases of $45 billion a month to replace its Operation Twist programme, which is due to expire at the end of the year.

Peter Fertig, consultant with Quantitative Commodity Research, said that despite a drop in the U.S. unemployment rate, investors anticipated a climate of further monetary stimulus, which benefits gold by keeping up pressure on longer-term interest rates and stoking inflation expectations.

"As long as the fiscal cliff is looming, the Fed is not going to spurn monetary stimulus," he said, referring to the looming $600 billion combination of expiring tax cuts and automatic spending reductions.

Spot gold rose 0.5 percent to $1,712.11 an ounce by 1119 GMT, while U.S. gold was up 0.5 percent to $1,713.60. Prices rose on Friday in the wake of better than expected U.S. payrolls data, which initially took to the metal to one-month lows.

While the data first stoked speculation that the Fed could hold off significantly more monetary easing, those expectations eased back as markets digested the report.

"Despite the upbeat tone of the most recent data, our economists do not expect a less dovish stance at the FOMC's December meeting due to the downside risk posed by the fiscal cliff," Barclays Capital said in a note. "Continuity is the theme for U.S. monetary policy."

In the short term, gold prices were also supported by gains in the euro versus the dollar, as the single currency firmed 0.2 percent. European shares fell, however, on worries over Italy's economy after Prime Minister Mario Monti said he would resign.

An election in February looks likely, raising questions over who will navigate the euro zone's third-biggest economy out of the debt crisis.

FUND HOLDINGS

Hedge fund and money managers cut their bullish bets on U.S. gold last week to the lowest level since late August, and also reduced silver longs, data from the U.S. Commodity Futures Trading Commission showed.

"The cracks in investor confidence we saw in the week preceding last, widened considerably this past week," Standard Bank said in a note on Monday. "Net speculative length dropped by a formidable 148.2 tonnes."

Holdings of gold ETFs fell more than 11,800 ounces on a net basis on Friday after hitting a record high earlier last week . ETF Securities reported an outflow of more than 16,500 ounces from its non-U.S. funds that day.

Indian gold prices extended gains for a fourth session to revisit its highest level in nearly a week, prompting buyers to hold off fresh purchases. Many are eyeing the Fed meeting starting Tuesday for direction.

From a technical perspective, gold prices are likely to encounter support at their 100-day moving average around $1,702 an ounce, a level it dipped below last week for the first time since mid-August.

Among other precious metals, silver was up 1 percent at $33.32 an ounce. Spot platinum was up 1.1 percent at $1,612.70, while palladium was up 0.2 percent at $694.30, having earlier hit a near three-month peak at $699.50.

Improving vehicle market in China is likely to provide some help for platinum group metals, used in producing exhaust-reducing autocatalysts. – Reuters