Gold drops on stronger dollar as investors strap in for Fed meet

Gold prices drifted lower on Thursday, with a firmer dollar and U.S bond yields diminishing its appeal, as investors turned their attention to next week's US Federal Reserve meeting for clues on when it will begin tapering its stimulus.

Spot gold was down 0.8% at $1,778.80 per ounce at 1108 GMT, while US gold futures also fell 0.8% to $1,780.

The dollar index rose 0.2%, increasing the cost of purchasing bullion for those holding other currencies.

The Federal Open Market Committee is due to meet on Sept. 21-22. A growing number of policymakers have expressed their support for a reduction in the central bank's asset purchases this year.

"There are a lot of members in the FOMC who are in favour of commencing tapering this year and therefore the outlook for gold is not positive," said Quantitative Commodity Research analyst Peter Fertig, adding recent data showing US inflation slowed last month was unlikely to postpone tapering.

Reduced central bank stimulus tends to lift bond yields, which raises the opportunity cost of holding non-interest bearing gold. It also helps boost the dollar, further weighing on bullion.

But "tapering stimulus will not be favourable for stocks and gold could be one of the beneficiaries from money exiting the stock market," said Vincent Tie, sales manager at Singapore dealer, Silver Bullion.

"With the Fed slated to begin tapering by December, we could see higher gold prices in Q4, 2021."

Analysts at ANZ also said in a note that negative real yields and inflation expectations should support investment demand for gold despite the Fed signalling that tapering and rate hikes are around the corner.

Indicative of sentiment, holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.2% to 998.46 tonnes on Wednesday.

Elsewhere, silver fell 1.6% to $23.45 per ounce, while palladium climbed 2.4% to $2,051.82.