Gold prices dropped on Wednesday as optimism surrounding U.S.-China trade talks weakened demand for safe-haven assets, ahead of the Federal Reserve's policy decision later in the day.

Spot gold fell 1.2% to $3,389.37 an ounce as of 0628 GMT. The metal had climbed nearly 3% on Tuesday.

"Gold seems to be pulling back amid a broad-based 'risk on' move across markets... this is a pro-cyclical configuration that might echo optimism amid clues that the U.S. and China have started real trade negotiations," said Ilya Spivak, head of global macro at Tastylive. GLOB/MKTS

U.S. Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet top Chinese economic official, He Lifeng, in Switzerland this weekend to discuss tariffs.

Both countries imposed tit-for-tat tariffs last month, triggering a trade war that stoked global recessionary fears.

Investor attention centres on the Federal Open Market Committee (FOMC) meeting, where the Fed is expected to hold rates steady, followed by remarks from Chair Jerome Powell.

Traders are expecting rate cuts of 80 basis points this year, starting in July.

The FOMC will remain vague to keep as much flexibility as possible as it tries to discern what this trade war will mean for growth and inflation, Spivak said.

Gold, traditionally seen as a hedge against economic and political uncertainties, thrives in a low-interest rate environment.

On the geopolitical front, India attacked Pakistan and Pakistan Kashmir on Wednesday and Pakistan said it had shot down five Indian fighter jets in the worst fighting in more than two decades between the two nuclear-armed enemies.

"Rising short-term geopolitical risk premium due to the current hostility between India and Pakistan" is keeping a floor under the market, said Kelvin Wong, senior market analyst, Asia Pacific at OANDA.

Spot silver eased 0.6% to $33.04 an ounce, platinum fell 0.1% to $984.30 and palladium lost 0.7% to $968.25.

Source: Reuters