Market participants are now pricing in a 93% chance the Fed will raise rates by 50 basis points at its Dec. 13-14 policy meeting. Investors will also focus on the November U.S. Consumer Price Index (CPI) report, due on Dec. 13.

Clifford Bennett, chief economist at ACY Securities, said that with the CPI data and the Fed meeting on the horizon, gold could indeed rise. If the Fed slows the pace of rate hikes as expected and the CPI data is relatively benign, "then the dollar could weaken and gold will suddenly flat out."

But a modest increase in the number of Americans filing new claims for jobless benefits last week suggested the labor market remains tight and strong despite growing fears of a recession. That could prevent the Fed from slowing its pace of rate hikes.

Edward Moya, senior analyst at OANDA, said in a note: "Traders will be watching the Fed's views on inflation trends and the possibility of a peak in interest rates. Until there are further signs, gold prices appear to be hovering around $1,800."

While weak household survey data suggest non-farm payrolls may be overstating the strength of U.S. job growth, even modest job growth could be enough to tighten the labor market if supply doesn't grow at all. Other indicators such as JOLTs job vacancies confirm that labor demand is still on the rise. With wage inflation now well above the 2% inflation target, the Fed has made little progress in bringing markets back into balance.

The U.S. economy is still on a moderate growth track in the fourth quarter, and the Federal Reserve needs to force a mild recession next year to avoid prolonged high inflation. Reducing demand would require overall financial conditions to tighten again, which could include more rate hikes in the first quarter, still-rising long-term real yields, and a stronger dollar.