Gold drops 1 percent on speculation over Fed tapering

By Jan Harvey and Julia Fioretti

NEW YORK/LONDON (Reuters) - Gold fell around 1 percent on Tuesday as investors shed some bullish bets on expectations that the U.S. Federal Reserve may be poised to trim its bullion-friendly economic stimulus.

Palladium dropped 2 percent to a two-month low, underperforming other precious metals, as a slide below a key support level near $700 an ounce triggered technical selling, traders said.

Data showing flat U.S. consumer prices in November also pressured gold, but the lack of inflation pressures in the economy will probably not stop the Fed from scaling back its bond-buying program soon, analysts said.

"While the prospect of an immediate taper seems to be diminishing for now, it seems only inevitable that the Fed will act sooner rather than later, and the longer-term investors are still being seen to reduce their exposure to gold as a result," said a trader at TD Securities' precious metals desk.

Spot gold was down 0.9 percent at $1,228.54 an ounce by 1:52 p.m. EST (1852 GMT).

U.S. Comex gold futures for February delivery settled down $14.30 an ounce to $1,230.10, with trading volume about 25 percent lower than its 30-day average.

Most observers expect the U.S. central bank to keep its $85 billion-a-month bond-buying stimulus in place, but recent brisk improvements in the labor market have raised the chances that the Fed, at its December 17-18 meeting, will decide to taper its economic stimulus program as early as this month.

A run of well-received U.S. economic data, including November payrolls earlier in the month, has fueled speculation that the Fed may taper stimulus sooner rather than later. Gold prices were down 25 percent this year mainly on Fed taper fears.

PHYSICAL, INVESTMENT DEMAND OFF

Consumers of physical gold in Asia held off fresh purchases in anticipation of lower prices.

In India, buying remained low-key due to non-availability of stocks, supporting premiums.

Investment demand for physical bullion was lackluster, with the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, posting its biggest daily outflow in nearly two months on Monday.

On Monday, the fund's holdings were down 8.7 tonnes, or 1 percent, to 818.9 tonnes, their lowest in nearly five years.

Silver dipped 0.5 percent to $19.84 an ounce, while platinum fell 1 percent to $1,344.24 an ounce and palladium dropped 2.1 percent to $698.97 an ounce.

(Editing by William Hardy, Dale Hudson and Bernadette Baum)