PRECIOUS-Palladium near 16-year high, gold steadies ahead of Fed meeting

    * Two-day Fed meeting starts on Tuesday
    * Focus on pace of Fed rate hikes
    * GRAPHIC-2017 asset returns:

 (Updates prices; adds comment, second byline, NEW YORK
    By Marcy Nicholson and Zandi Shabalala
    NEW YORK/LONDON, June 12 (Reuters) - Strong speculative
demand kept palladium near 16-year highs on Monday, though weak
fundamentals are soon expected to take their toll on prices of
the metal, which is used to make autocatalysts for
gasoline-fueled cars. 
    Meanwhile, gold was little changed ahead of a U.S. Federal
Reserve policy meeting on Tuesday and Wednesday, with analysts
saying the U.S. central bank could take an aggressively hawkish
posture of signaling a balance sheet reduction later this year
and another interest rate increase in December. 
    Spot gold        was up 0.08 percent at $1,266.92 an ounce
by 2:54 p.m. EDT (1854 GMT), having shed 1 percent on Friday in
its biggest one-day percentage fall since May 18. U.S. gold
futures         settled down 0.2 percent at $1,268.90.
    Palladium        gained 0.3 percent to $893 an ounce after
rising above $910 on Friday, its highest since 2001.
    "It seems to be speculators driving the price higher," said
Robin Bhar, head of metals research at Societe Generale, adding
that there was a shortage of metal for immediate delivery. 
    That shortage has created a premium, or backwardation, of
about $6 and $21 dollars an ounce for the June and July futures
respectively over the August contract.        
    But analysts say declining car sales in China and the United
States point to weaker demand for palladium.             
    "The palladium market is experiencing a short-squeeze, which
we believe is driven by investment demand rather than industrial
demand," said Julius Baer analyst Carsten Menke. 
    "Eventually, the weaker demand backdrop from automotive
catalysts should be reflected in deteriorating sentiment and
falling prices. We remain bearish."
    NYMEX palladium stocks PA-STX-COMEX fell to a 14-year low
of 42,450 ounces on Friday.
    "NYMEX palladium stocks have been falling since 2014, and
remain at low levels ... this suggests reduced availability of
'last resort' stocks while speculative positioning is closing in
on record highs," said Standard Chartered in a note. 
    "We forecast the palladium market to swing deeper into
deficit this year, at 563,000 ounces, driven by continued growth
in autocatalyst demand and lackluster supply."
    Johnson Matthey         , a leading manufacturer of vehicle
catalysts, forecast last month that the palladium market would
show a deficit of 792,000 ounces in 2017.             
    Overall, precious metals markets are waiting for the outcome
of the Fed's meeting on Wednesday at 2 p.m. EDT (1800 GMT).
    Higher rates, as expected by the market, could boost the
dollar, making commodities priced in the greenback more
expensive for holders of other currencies.
    Silver        fell more than 1 percent to a 2-1/2-week low
of $16.87 an ounce, while platinum        was up 1.2 percent at

 (Additional reporting by Nithin Prasad in Bengaluru; Editing by
David Goodman and Steve Orlofsky)