Gold stabilizes ahead of U.S. monetary policy meeting

By Renita D. Young and Pratima Desai

NEW YORK/LONDON (Reuters) - Gold steadied on Monday ahead of a meeting of the U.S. Federal Reserve this week that could yield clues to the future direction of U.S. interest rates and the dollar, key factors for precious metals prices.

Spot gold was steady at $1,223.14 per ounce by 1:34 p.m. EDT (1734 GMT), compared with a one-year low of $1,211.08 hit earlier this month. U.S. gold futures for August delivery settled down $1.70, or 0.1 percent, at $1,221.30 per ounce.

A higher U.S. currency makes dollar-denominated gold more expensive for holders of other currencies, which could subdue demand. Dollar gains since the middle of April have led to losses of about 10 percent for spot gold prices.

"Gold is still a dollar story, and I see no sign of the correlation breaking down," said Oliver Nugent, commodities strategist at ING, adding that a significant driver for dollar gains has been safe haven flows due to trade tensions. "Lack of investor interest is leading gold to behave like a currency, there are no safe haven flows to gold."

The United States signalled last week it is set to push ahead with talks with Canada and Mexico after agreeing to suspend hostilities over tariffs with Europe in a deal that may clear the way for renewed pressure on China.

"There's a flurry of Fed announcements coming out this week, and I think we are in a holding pattern until we hear from one of these central bank opinions," said John Caruso, senior market strategist at RJO Futures.

The Bank of Japan ends a two-day monetary policy meeting on Tuesday, while the Bank of England is expected to raise interest rates on Thursday.

The U.S. central bank's two-day meeting, which starts on Tuesday, is expected to keep benchmark interest rates steady after hiking in June. Investors will be looking for clues to the timing of the next rise. Expectations are for two more rate rises this year and three next year.

"Higher U.S. interest rates create an opportunity cost for investors," a gold trader said, referring to gold earning no interest or dividends while costing money to insure and store.

Hedge funds and money managers increased their net short position in COMEX gold contracts to their highest since 2006, in the week to July 24, recent U.S. Commodity Futures Trading Commission data showed.

Silver was up 0.4 percent at $15.52 an ounce, platinum added 0.2 percent at $827 and palladium gained 0.3 percent at $923.50.

(Additional reporting by Apeksha Nair in Bengaluru; Editing by David Evans, Susan Fenton and Will Dunham)