Gold treads water ahead of two-day Fed meeting

By Swati Verma

BENGALURU (Reuters) - Gold was little changed on Tuesday, after inching up in the previous session, ahead of a key meeting of the U.S Federal Reserve that begins later in the day.

Spot gold was steady at $1,161.75 an ounce at 0717 GMT, after gaining 0.4 percent on Monday.

U.S. gold futures were down 0.2 percent at $1,163.60.

Spot prices recovered from a 10-month low of $1,151.34 an ounce, touched in the previous session, as U.S. Treasury yields came off their highs and the dollar eased ahead of the Fed meeting.

"Gold may not be able to have a clear shot at going substantially higher until the conclusion of the FOMC on Wednesday," HSBC analyst James Steel wrote in a note.

"The market's attention will also shift to how many - if any - rate rises are likely to come in 2017."

The Fed is widely expected to raise interest rates for the first time in 2016 at a two-day meeting, with markets pricing in a nearly 100 percent chance of a quarter percentage point increase to the Fed's target range of 0.25 to 0.50 percent.

Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding assets such as bullion.

"With 3 percent growth, inflation picking up and an incoming administration that is not that impressed with the job the Fed is doing, we could see the central bank signalling a much more hawkish tone going forward," INTL FCStone analyst Edward Meir said in a note.

"If we are correct, we should see a rise in rates and a stronger dollar - the two could spark a fresh selloff in gold to the $1,140 level we are targeting for the precious metal for some time in December."

Holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.14 percent to 856.26 tonnes on Monday from Friday. Holdings are down over 9 pct since November.

Outflows from gold exchange traded products (ETP) continued on Fed's looming December rate hike, said ETF Securities' commodity strategist Martin Arnold.

A greater 'risk-on' mindset from investors, accompanied by a stronger dollar as the Fed prepares to hike rates for the first time in twelve months weighed on the gold prices, Arnold said.

Silver was flat at $17.07 an ounce, after rising nearly 1.4 percent in the previous session.

Platinum shed 0.9 percent to $923.30. The white metal rose as much as 1.9 percent in the previous session.

Palladium climbed 0.5 percent to $725.70.

(Reporting by Nallur Sethuraman and Swati Verma in Bengaluru; Editing by Richard Pullin and Sherry Jacob-Phillips)