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Gold Drops, Looks Ahead to Fed Meeting

Price action this week in the gold market has been mixed, but traders say they remain focused on the Federal Reserve's policy statement and economic projections due out Wednesday. Chairman Ben Bernanke will follow those reports with a press conference.

Analysts and economists are prepared for Fed members to scale back the central bank's purchases of mortgage-backed securities and longer-term Treasuries.

Such a move could trigger a pullback in gold as less monetary stimulus would suggest softening of inflationary pressure. Investors often view gold as a hedge against inflation, which had contributed to the huge gap higher in gold prices from 2008 to the top in 2011.

There remains skepticism that the Fed will take such action in its upcoming meeting.

"I think all eyes continue to point on the Fed ... and I think that the talk about tapering is very premature," said Anthem Blanchard, CEO of Anthem Vault.

Traders are keeping an eye on India as the government begins to curb the imports of gold there. The government has required importers to pay 100% cash margin for letters of credit, and that compounded with a previously required 6% tax on gold imports, could cut into imports for the country. Physical demand from India and China has offered support to the yellow metal after the paper markets -- gold exchange traded funds and gold futures -- plummeted in mid-April, but that support has waned in recent weeks.

"Despite the pullback in gold prices, physical demand in China and India is proving less impressive than last month's kilo-bar premiums would have suggested," Natixis wrote in its weekly commodities report on Thursday.

Gold mining stocks were mostly lower on Thursday. Shares of Eldorado Gold (EGO) were slipping 2%, and shares of Yamana Gold (AUY) were off 1.5%.

Among volume leaders, Barrick Gold (ABX) was down 2%.

Gold ETF SPDR Gold Trust (GLD) was declining 0.87% to $133.08, while iShares Gold Trust (IAU) was sliding 0.85% to $13.38.

Commerzbank AG's Briesemann said outflows from gold ETFs has continued to come down in recent days.

-- Written by Joe Deaux in New York.

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