By Eric Onstad
LONDON (Reuters) - Gold edged higher on Monday after the dollar dropped following remarks by the head of the European Central Bank, although activity was muted ahead of a U.S. central bank meeting this week.
Spot gold was up 0.3 percent at $1,202.59 an ounce by 1350 GMT, after declining as much as 1.3 percent on Friday.
U.S. gold futures gained 0.5 percent to $1,207 an ounce. Liquidity was thin during Asian trading hours on Monday as markets in Japan and China were closed for a holiday.
The dollar index fell after comments by ECB President Mario Draghi on wage growth and vigorous inflation lifted the euro.
"I remain constructive on gold after we've seen it consolidate for the past month. The risk to the dollar is some additional weakness, but at this stage we have to maintain a neutral stance," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.
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Gold needed to break above $1,212 to make further progress on the upside, he added.
Investors are awaiting details from the two-day Federal Reserve meeting concluding on Wednesday, when the U.S. central bank is widely expected to raise benchmark interest rates and shed light on the path for future rate hikes.
"The question is what kind of wording is going to accompany that hike. Based on that, gold is unlikely to make much of a move ahead of that meeting," Hansen said. Gold has fallen more than 12 percent since a peak in April against a backdrop of trade disputes and as rising U.S. interest rates diminish demand for non-interest bearing bullion.
The United States and China imposed fresh tariffs on each other's goods on Monday as the world's biggest economies showed no signs of backing down from a trade dispute that is expected to knock global economic growth.
Meanwhile, speculators increased their net short position in COMEX gold contracts in the week to Sept. 18, U.S. data showed on Friday.
"The price would rise noticeably if sentiment were to turn and short positions were to be covered. This may happen following the Fed rate hike expected on Wednesday, as gold has often gained following a Fed rate hike in the past," Commerzbank said in a note.
Among other precious metals, spot silver rose 0.2 percent to $14.28 an ounce. Platinum added 0.1 percent to $827, after hitting its highest in six weeks at $838.40 on Friday.
Palladium gained 0.6 percent to $1,055 an ounce after hitting a high of $1,060, the highest since Feb. 27.
(Additional reporting by Nallur Sethuraman in Bengaluru. Editing by Jane Merriman/Louise Heavens/Alexander Smith)
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