PRECIOUS-Gold turns negative as dollar strengthens from U.S.-China tariff spat

* Gold erases earlier gains, heads for first weekly gain in three

* U.S.-China trade developments strengthen dollar (Recasts; updates prices; adds comment, second byline, NEW YORK to dateline)

NEW YORK/LONDON, Sept 14 (Reuters) - Gold turned negative on Friday, as the U.S. dollar rose against the Chinese yuan after U.S. President Donald Trump reportedly told aides to proceed with tariffs on Chinese imports.

Trump has directed aides to place tariffs on about $200 billion of Chinese goods, according to a person familiar with the matter. Bloomberg News first reported Trump’s action.

“I think that’s what’s driving gold lower, the dollar higher and the S&P market lower,” said Michael Matousek, head trader at U.S. Global Investors. “Companies are theoretically going to make less money because they will get that tax.”

After the latest U.S.-China tariff development, the dollar index extended earlier gains against a basket of currencies, including the yuan, while the S&P 500 declined.

Spot gold lost 0.5 percent at $1,195.21 per ounce by 1:35 p.m. EDT (1735 GMT), having hit its highest since Aug. 28 at $1,212.65 on Thursday. It has risen more than 0.1 percent so far this week, on track for its first weekly gain in three.

U.S. gold futures for December delivery settled down $7.10, or 0.6 percent, at $1,201.10 per ounce.

The months-long trade tension between Washington and Beijing has prompted investors to buy the U.S. dollar, in the belief that the United States has less to lose from the dispute.

Gold has shown a close correlation to the currency of China, the biggest gold consuming nation, analysts say.

Meanwhile, investors widely expect another U.S. interest rate increase. Higher rates make gold less attractive since it does not pay interest but costs money to store and insure.

Gold prices have declined about 12 percent from a peak of $1,365.23 in April amid the intensifying global trade tensions and rising U.S. interest rates.

In other precious metals, spot silver dropped 0.4 percent at $14.10 per ounce, headed for a 0.1 percent weekly increase. Palladium declined 0.4 percent at $978.30, and was poised for a 0.1 percent weekly decline.

Platinum declined 0.9 percent at $793 an ounce after touching a one-month high at $812.30 on Thursday, to end the week up about 1.9 percent.

“We’ve seen some traders dipping their toes back in platinum, which is at a near record discount to gold,” said Ole Hansen, head of commodity strategy at Saxo Bank.

“That’s probably platinum’s best friend at the moment, that it’s relatively cheap, because the concerns about growth and car manufacturing are still providing some headwinds.”

Platinum’s discount to gold has narrowed to $398 an ounce from $417 a week ago and a record of $426 in April. (Additional reporting by Nallur Sethuraman in Bengaluru; Editing by David Evans and Rosalba O’Brien)