Gold holds near five-month low before Fed rate decision

By Peter Hobson

LONDON (Reuters) - Gold prices on Wednesday held near their lowest in nearly five months as investors looked ahead to an expected U.S. interest rate increase and clues from the U.S. Federal Reserve on its plans for further rises next year.

The Fed's policy statement and latest economic projections are due at 1900 GMT. Fed Chair Janet Yellen will give a news conference half an hour later, her last before her four-year term ends early next year.

The Fed has increased rates twice this year and is expected to raise them three more times in 2018.

Gold is sensitive to rising rates because they push up bond yields, reducing the appeal of non-yielding gold. They also tend to boost the dollar, making gold more expensive for holders of other currencies.

Spot gold was down 0.2 percent at $1,241.13 an ounce at 1256 GMT. On Tuesday it touched $1,235.92, the lowest since July 20.

U.S. gold futures were up 0.1 percent at $1,243.10 an ounce.

Gold prices have tended to fall before recent U.S. rate hikes but recover shortly afterwards, said Saxo Bank analyst Ole Hansen.

Yellen's successor, Fed Governor Jerome Powell, has hinted that he has a cautious approach to rate increases.

Much will depend on the projections, said Think Markets analyst Naeem Aslam.

"If the Fed comes out of the gate with more hawkish views on the economy and sees inflation improving, it could impact the dollar index. Any further strength in the dollar index would push the gold price lower," Aslam said.

The dollar weakened on Wednesday after a Democrat won a U.S. Senate seat in Alabama, reducing the Republican majority and likely making it harder for them to enact tax cuts that would stimulate the economy.

Global shares were close to record highs, continuing a rally that has attracted investment away from gold.

On the technical side, fibonacci support was at around $1,240 and a close below that level could trigger further falls, said Saxo Bank's Hansen.

Analysts at ScotiaMocatta said momentum indicators showed gold could reach its July low of $1,204.90.

Demand for gold as insurance against geopolitical risk could also fall after U.S. Secretary of State Rex Tillerson offered direct talks with North Korea without pre-conditions, INTL FCStone analyst Edward Meir said.

In other precious metals, silver was down 0.5 percent at $15.65 an ounce after hitting a five-month low of $15.60.

Platinum was 0.3 percent lower at $873.90 an ounce, after touching its lowest since February 2016 at $868.80 on Tuesday.

Palladium was down 0.3 percent at $1,009.47 an ounce.

(Additional reporting by Apeksha Nair in Bengaluru; Editing by Edmund Blair)