Gold edged down on Thursday, holding near a one-month low hit in the previous session, pressured by a slightly stronger dollar as investors await a policy meeting of the European Central Bank for fresh clues to its stance.

    The decline in gold prices has attracted some physical buyers in Asia, underpinning market sentiment.

    Stalemated negotiations in Washington between Democrats and Republicans to resolve the “fiscal cliff” are still the focus of the market. Neither offered any new compromise in public.

    The slow progress in the budget talks has provided little impetus for gold, contrary to what many traders had expected. Spot gold has fallen for seven of nine sessions.

    But investors continued to flock to gold-backed exchange-traded funds, holdings of which hit a record high of 76.074 million ounces on Dec. 5, up 1.4 percent from the end of October. This compares with a drop of 1.6 percent in spot gold prices during the period.

    “ETF holdings keep hitting record highs, despite stagnant gold prices, which means that funds are still optimistic on gold’s outlook,” said Li Ning, an analyst at Shanghai CIFCO Futures.

    Li expected gold to revisit the $1,800-level in the first half of 2013, and to ease in the rest of the year, as an improving global economy may allow central banks to exit their accommodative monetary policies — a key propeller of gold’s 8-percent gain this year.

    The European Central Bank is widely expected to hold rates unchanged at a policy meeting later in the day, but may shed light on future policy moves.

    The euro eased a touch against the dollar ahead of the ECB meeting, further away from a seven-week high hit in the previous session, while the dollar index rose slightly, putting pressure on dollar-priced commodities, making them pricier for buyers holding other currencies.

    Spot gold edged down 0.3 percent to $1,687.74 an ounce by 0649 GMT, near a one-month low of $1,684.40 hit in the previous session.

    U.S. gold lost 0.4 percent to $1,687.10.   

    PHYSICAL DEMAND IMPROVES

    The recent drop in prices fuelled buying interest from physical buyers, dealers said.

    “Physical demand has picked up since prices fell,” said a Singapore-based dealer. “It is very easy to sell as prices seem unable to rebound above $1,700. Customers feel comfortable buying at this price level.”

    The return of physical buying interest could help offset the impact of liquidation of long positions for profit-taking before the end of the year, and help support gold prices.

    “Improving physical demand means that we are probably getting closer to the bottom of gold prices for now,” said Yuichi Ikemizu, branch manager for Standard Bank in Tokyo, adding that $1,670 would be a near-term support level.

 Precious metals prices 0649 GMT

  COMEX gold and silver contracts show the most active months  

  (Editing by Clarence Fernandez)