By Pratima Desai
LONDON (Reuters) - Gold steadied on Monday ahead of a meeting of the U.S. Federal Reserve this week which could yield clues to the future direction of U.S. interest rates and the dollar, key factors for precious metal prices.
Spot gold was a touch firmer at $1,223.21 an ounce at 1339 GMT compared with a one-year low of $1,211.08 hit earlier this month. U.S. gold futures were 0.1 percent lower at $1,222.60 an 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.
"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."
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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.
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, but 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.
A lack of investor interest can be seen in the holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust, which at 25.727 million ounces have tumbled about 8 percent since April.
Hedge funds and money managers increased their net short position in COMEX gold contracts to a record high in the week to July 24, U.S. Commodity Futures Trading Commission (CFTC) data showed on Friday.
Investors added 5,001 contracts to their net short position, bringing it to 27,156 contracts, the biggest on records dating back to 2006, CFTC data showed.
Silver was up 0.3 percent at $15.50 an ounce, platinum added 0.5 percent to $829.40 and palladium gained 1.1 percent to $930.70.
(Additional reporting by Apeksha Nair in Bengaluru; editing by David Evans and Susan Fenton)