* Gold drifts lower, tracks oil hit by supply fears
* Market eyes Fed decision and accompanying statement
* Russian gold output seen up 5.2 percent in Jan-May period
(Recasts, adds comment, updates prices)
By Jan Harvey and Raissa Kasolowsky
LONDON, June 25 (Reuters) - Gold drifted lower in Europe on
Wednesday, tracking oil, but held within a range as the market
waited for a key rate decision from the Federal Reserve and its
statement to find more clues on future monetary policy.
Gold <XAU=> traded at $882.30/883.30 an ounce at 1418 GMT
from $888.70/889.70 an ounce late in New York on Tuesday.
Oil, a key external driver of gold, dropped to just below
$136 a barrel ahead of U.S. government inventory data expected
to show crude stocks fell for a sixth consecutive week.
[]
"I think the drop in oil is the most likely scenario for the
drop in gold but it is wedged in a pretty tight range," said
analyst Michael Jansen, at JP Morgan.
"Positions are fairly small ahead of the rate decision."
The U.S. central bank is widely expected to leave interest
rates unchanged at 2 percent. However, if it fails to adopt a
widely expected hawkish tone in its statement, the dollar could
suffer, buoying gold.
Gold moves in the opposite direction to the dollar, as it is
often bought as an alternative investment to the U.S. currency.
Dollar-priced gold also becomes cheaper for holders of other
currencies as the greenback softens.
"If people are ruling out any early increases in interest
rates, then you could see this as slightly negative for the
dollar, which would be positive for gold," said Daniel Smith, an
analyst at Standard Chartered.
"If they're flagging up much stronger increases then the
opposite should take place."
The precious metal has benefitted this week from a dip in
prices, which are down around $30 from a month ago.
A $25 price slide on Monday was met by good buying from
jewellers and institutional investors, with inflows into New
York's largest ETF rising 2 percent that day.
"Jewellery demand, although low, is reported to pick up when
prices fall to $880 an ounce, indicating a level of support,"
said Fairfax analyst John Meyer.
"No doubt if there was a sharp fall in the gold price then
jewellers could start stocking up, since longer term
expectations are of higher prices to come."
In supply news, an industry body said it expected Russian
gold output to rise by 5.2 percent in the first five months of
2008 to 41.834 tonnes. []
Russia is the world's fifth largest supplier of mined gold
and its mine production has been falling for the last five
years, but producers said this year may see a turning point in
the trend.
Elsewhere the world's number four gold miner, Gold Fields
Limited <GFIJ.J>, said its fourth-quarter output is likely to be
4.5 percent higher than the previous quarter. []
Production at its South African operations is likely to be
up nearly 7 percent, it added.
Among other precious metals, silver edged down to
$16.61/16.68 from $16.64/16.70 late in New York on Tuesday.
Spot platinum <XPT=> was at $2,007/2,027 versus $2,011/2,031
late in New York, while spot palladium <XPD=> slipped to
$459.50/467.50 an ounce from $464.00/472.00 an ounce.
(Reporting by Jan Harvey; editing by Christopher Johnson)
