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Gold falls after US data as focus shifts back to rate rise

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Gold fell on Tuesday, as the dollar rebounded following upbeat U.S. housing data that supported views of a looming interest rate increase by the Federal Reserve, while silver tumbled on the heels of falling copper prices.

U.S. housing starts rose to a near eight-year high in July as builders ramped up construction of single-family homes, suggesting that the economy was firing on almost all cylinders.

"It looks like in the very short term the data this afternoon has been reasonably positive, so the dollar has appreciated on the back of that and gold is on a downtrend," Mitsubishi Corp strategist Jonathan Butler said.

Spot gold was flat at $1,116 an ounce, after falling as much as 0.7 percent. U.S. gold for December delivery settled down 0.1 percent at $1,116.90 an ounce.

"It's been attracting odd lot physical trading," said James Steel, chief metals analyst for HSBC Securities in New York, referring to what lifted gold prices up from their lows.

Spot silver was the worst-performing precious metal, dropping as much as 4 percent to $14.70 an ounce, its biggest tumble since July 7. It was pressured by a six-year low in copper prices as worries about weak demand growth from top consumer China were reinforced by tumbling equity prices in Shanghai.

Spot palladium fell by as much as 3.8 percent to $588.75 an ounce, the lowest since Aug. 4.

The dollar traded up 0.2 percent against a basket of leading currencies, while European shares were mixed and U.S. stocks were lower, following a 6 percent slump in Chinese markets.

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Solid jobs growth, rebounding retail sales and a housing sector on the mend suggest the Federal Reserve could be on track to raise interest rates this year, perhaps at its next policy meeting in September.

Higher interest rates would put non-yield-bearing gold under further pressure, increasing the opportunity cost of holding the metal.

"Despite the recent market volatility caused by the RMB (yuan) devaluation last week, (we) believe that the Fed will look past international macro developments, focusing instead on positive trends in U.S. labor data, and therefore continue to see September Fed lift-off as the most likely scenario," Citi said in a note.

There should be more clues on the Fed's thinking regarding interest rates when the minutes of the U.S. central bank's July 28-29 meeting are released on Wednesday at 2 p.m. EDT.