PRECIOUS-Gold erases early losses, awaits direction from Fed
* Gold bounces back above $1,320/oz from low at $1,309/oz
* Data eyed for clues on U.S. policy ahead of Fed meeting
* South African platinum fund reports fresh inflows
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LONDON, July 25 (Reuters) - Gold erased losses on Thursday, after briefly extending the previous day's 2 percent sell-off, as the dollar's fall against a currency basket supported the precious metal.
The lack of clear direction in the gold price reflected indecision among traders awaiting fresh indications on U.S. Federal Reserve policy, with the central bank due to meet next week.
The metal hit a one-month high earlier this week after assurances from the Fed that any changes to its gold-friendly quantitative easing (QE) policy would depend on economic data.
Figures on Wednesday showing new U.S. home sales jumped to a five-year in June helped knock gold prices sharply lower, however, and trading has been choppy as a failure to hold onto gains spooked investors, prompting further liquidation.
Spot gold fell as low as $1,308.74 an ounce in early trade but had recovered to $1,326.86 an ounce by 1418 GMT, up 0.5 percent. U.S. gold futures for August delivery were up $7.60 at $1,327.10 an ounce.
"Gold is still searching for some decisive news either way from which it can take a trend," Mitsubishi analyst Jonathan Butler said. "In the absence of that, we are going to see some pretty choppy, volatile trading."
"Gold dropped back earlier, but has come back again," he said. "All eyes are still on the Fed meeting next week."
The markets are awaiting fresh clues from the Fed on the outlook for its QE programme, which has helped fuel a gold price rally to record highs in recent years by keeping up pressure on long-term interest rates and fuelling fears over inflation.
The U.S. central bank meets next Tuesday and Wednesday, with a statement on policy due at the end of the session. Ahead of that, data will be closely watched, as will be clues on demand for physical gold from the major consumers, China and India.
"Demand out of China is still strong, but with gold at $1,340, it was not as strong as it was below $1,300, so we don't have that strong support," Standard Bank analyst Walter de Wet said.
"We're likely to find support around $1,300, but gold is going to struggle to maintain prices above $1,330, at least ahead of next week's Fed meeting," de Wet added. "Our position is that the Fed will continue to taper QE, and market consensus believes it will probably happen in September."
Comex August gold options are due to expire on Thursday. Open interest in U.S. Comex gold options rose to a record high of more than 1.8 million contracts earlier this week, according to COMEX owner CME Group.
"There is a big open interest around $1,300 and $1,310 which might stall the sell-off," said a Hong Kong-based trader.
Silver was up 0.2 percent at $20.18 an ounce, while spot platinum was down 0.1 percent at $1,440.99 an ounce and palladium was down 0.3 percent at $742.22 an ounce.
Johnson Matthey's profits rose 8 percent in the first quarter of its financial year, boosted by stronger sales of catalysts for trucks in Europe. JM is one of the world's biggest refiners of platinum group metals.
In South Africa, Absa Capital reported a 3,990-ounce increase in holdings of its New Gold Platinum fund on Wednesday, bringing its total weekly inflow to 15,969 ounces, already double last week's total.
It now holds 543,463 ounces of platinum, and is the second largest platinum exchange-traded fund (ETF) in the world.
(Additional reporting by A. Ananthalakshmi and Veronica Brown; Editing by Anthony Barker)