Gold rose about 2 percent to a three-week high on Tuesday, boosted by technical buying and funds' short-covering in thin trade ahead of the Federal Reserve's December policy meeting, at which some market participants expect the central bank to begin cutting back on its stimulus.

Bullion posted its biggest three-day rise in nearly two months. A break above strong resistance at $1,250 an ounce — a level gold had failed to breach in the last three weeks — triggered heavy buy orders, traders said.

Some funds bought to cover short positions ahead of the Fed's policy meeting next week, traders said.

St. Louis Federal Reserve Bank President James Bullard on Monday unexpectedly voiced his support for a "small taper," joining a chorus of more-hawkish officials who also want to begin trimming the central bank's $85 billion per month asset-purchase pace.

"Investors are starting to realize that Fed tapering will come, but the Fed is also likely to be behind the curve in raising interest rates," said Axel Merk, portfolio manager of California-based Merk Funds, which has about $450 million of assets under management.

"Gold can do quite well in a high-inflation environment," Merk said.

Spot gold surged 2 percent to $1,267.26 an ounce, its highest since Nov. 20. It was last up 1.8 percent at $1,263.44 an ounce by 3:38 p.m. EST (2038 GMT), its biggest one-day gain
since Oct. 22.
During the last three sessions, gold has gained over 3 percent, the largest three-day rise since Oct. 17.

U.S. Comex gold futures for February delivery settled up $26.90 at $1,261.10.
Trading volume finished 20 percent below its 30-day average, preliminary Reuters data showed.

Monday's Comex gold volume of 85,501 contracts was the lowest since Oct. 21, CME data shows. It was also one of the 5 lowest daily turnovers this year.

FED FOCUS

A Reuters poll on Monday showed the Fed was expected to start cutting its stimulus in March, even though some economists say that it might do so as early as this month.

"There is still heavy downside risk to the price of gold with the new expectation that there will be a taper seen with the December meeting," said Thomas Capalbo, precious metals
trader at New York brokerage Newedge.

Gold has lost about a quarter of its value this year largely on fears the bond purchases would be scaled back.

Among other precious metals, silver continued to take influence from gold and even outperformed the metal to rise 2.7 percent on the day to $20.35 an ounce. Platinum rose 1.1
percent to $1,386.99, while palladium edged up 0.2 percent to $734.50.