Gold edges higher but heads for monthly drop in August

By Jan Harvey

LONDON (Reuters) - Gold edged higher on Wednesday as the dollar softened, but remained on course to snap two months of gains in August on mounting speculation the Federal Reserve could raise interest rates sooner rather than later.

Investors are awaiting U.S. non-farm payroll data this week for further clues on the timing of a U.S. rate hike after Fed officials sounded a hawkish note at a meeting last weekend.

Spot gold was $1,314.16 an ounce at 0932 GMT, up 0.3 percent, having slipped 1 percent in the previous session to touch a two-month low of $1,308.65. The metal is heading for a 2.8 percent drop in August.

U.S. gold futures were up $1 at $1,317.50.

Fed Chair Janet Yellen said on Friday the case for higher rates was strengthening, while Vice Chair Stanley Fischer later suggested a hike could come as soon as September. Fischer added in an interview on Tuesday that the U.S. job market is nearly at full strength.

"Nerves have become a bit fraught ahead of the September FOMC meeting given the latest comments from Janet Yellen," Saxo Bank's head of commodities research Ole Hansen said. "The rising dollar and U.S. real rates have also been creating headwinds."

"But it all seems to be going in slow motion. We have seen no panic from either exchange-traded product investors, where holdings are up on the month, while hedge funds have only reduced net longs by 8 percent from the July peak."

Holdings of the world's largest gold-backed exchange-traded fund, New York-listed SPDR Gold Shares, are down 2.7 tonnes in August, compared with an inflow of 8 tonnes in July.

Gold is highly sensitive to rising U.S. interest rates, which increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.

The pace of rate hikes is heavily dependent on U.S. economic data. Friday's non-farm report for August, a closely watched barometer of the jobs market, could reinforce hawkish messages from Fed officials.

Ahead of that, ADP employment data, which tracks private payrolls, and the Chicago purchasing managers' index (PMI) are due later on Wednesday.

"Private payroll data out of the U.S. will help to give the market some direction," MKS said in a note. "However, it's unlikely we will see gold move outside of $1,300."

The dollar index eased 0.1 percent on Wednesday.

Silver was up 1 percent at $18.75 an ounce.

Platinum was up 0.7 percent at $1,059.60, having touched an eight-week low of $1,048 on Tuesday. Palladium was 0.8 percent higher at $682.77.

(Additional reporting by Nallur Sethuraman in Bengaluru; editing by Susan Thomas)