PRECIOUS-Gold falls as investors focus on U.S. stimulus outlook

Mon Jun 17, 2013 6:48am EDT

* Fed policy meeting on June 18-19

* India gold volumes drop, China still strong

* Dollar index rises as Fed meeting nears (Changes dateline, byline, adds quotes, updates prices)

By Veronica Brown

LONDON, June 17 (Reuters) - Gold dropped on Monday as the dollar rose, with investors keeping a keen eye on this week's U.S. Federal Reserve meeting for signals on the latest plans for its bond buying programme.

The Fed meets on June 18-19 against a backdrop of stronger-than-expected data on U.S. retail sales and the job market. All markets are seeking clues on any scaling back of its extra economic stimulus, quantitative easing (QE).

Spot gold fell 0.3 percent to $1,386.31 an ounce by 1029 GMT. Bullion closed up about half a percent for the week on Friday, helped by strong demand for coins and bars, a pullback in U.S. stocks and rising tensions in the Middle East.

U.S. gold was down 0.2 percent at $1,384.80.

"People are looking for more clarity - or not, as the case may be - on whether the Fed starts to ease off the QE bandwagon," SocGen analyst Robin Bhar said.

"We think that all the ingredients are place with an economy that looks to be improving, albeit gradual. The Fed may be thinking, 'the longer we do QE, are we actually creating more risk rather than reward?'," he added.

Any easing of the bond-buying programme, raising the prospect of eventual rate tightening, is seen as unfavourable for gold as it raises the opportunity cost of holding a metal that has no interest rate.

Markets have been volatile since Fed Chairman Ben Bernanke said last month the bank could scale back its stimulus measures, but bank officials have since given out conflicting signals.

Most economists expect the Fed to scale back the size of its bond purchases by year end, and several expect reduced buying as early as September, a Reuters poll showed.

DEMAND EASING

Gold prices were supported by some buying in China, the second biggest consumer of bullion after India. Shanghai gold futures were up 0.2 percent on Monday.

However, demand in Asia has cooled from peak levels seen after the mid-April sell-off in gold. Bullion is down 17 percent for the year after 12 years of annual gains.

Indian purchases of gold have fallen since an import duty hike earlier this month. The government is trying to narrow its current account deficit by reducing gold imports.

Victor Thianpiriya, commodities analyst at Australia and New Zealand Banking Group, said volumes to India have fallen significantly in the last two weeks.

Hedge funds and money managers slashed their bullish bets in gold and silver futures and options in the week to June 11, a report by the Commodity Futures Trading Commission showed on Friday.

Gold output in Australia, the No. 2 producer behind China, fell 5 percent in the first quarter on weather-related disruption to 63.5 tonnes, according to the latest Gold Quarterly Review by Surbiton Associates.

In other metals, silver fell 0.7 percent, having failed to vault $22 an ounce, while platinum was flat and palladium was down 0.3 percent. (Additional reporting by A. Ananthalakshmi; Editing by Anthony Barker)

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