PRECIOUS-Palladium near 16-year high, gold steadies ahead of Fed meeting

* Two-day Fed meeting starts on Tuesday

* Focus on pace of Fed rate hikes

* GRAPHIC-2017 asset returns: http://tmsnrt.rs/2jvdmXl

(Updates prices; adds comment, second byline, NEW YORK dateline) NEW YORK/LONDON, June 12 (Reuters) - Strong speculative demand kept palladium near 16-year highs on Monday, though weak fundamentals are soon expected to take their toll on prices of the metal, which is used to make autocatalysts for gasoline-fueled cars. Meanwhile, gold was little changed ahead of a U.S. Federal Reserve policy meeting on Tuesday and Wednesday, with analysts saying the U.S. central bank could take an aggressively hawkish posture of signaling a balance sheet reduction later this year and another interest rate increase in December.

Spot gold was up 0.08 percent at $1,266.92 an ounce

its biggest one-day percentage fall since May 18. U.S. gold

futures settled down 0.2 percent at $1,268.90. Palladium gained 0.3 percent to $893 an ounce after

rising above $910 on Friday, its highest since 2001. "It seems to be speculators driving the price higher," said Robin Bhar, head of metals research at Societe Generale, adding that there was a shortage of metal for immediate delivery. That shortage has created a premium, or backwardation, of about $6 and $21 dollars an ounce for the June and July futures respectively over the August contract. But analysts say declining car sales in China and the United States point to weaker demand for palladium. "The palladium market is experiencing a short-squeeze, which we believe is driven by investment demand rather than industrial demand," said Julius Baer analyst Carsten Menke. "Eventually, the weaker demand backdrop from automotive catalysts should be reflected in deteriorating sentiment and falling prices. We remain bearish." NYMEX palladium stocks <PA-STX-COMEX> fell to a 14-year low of 42,450 ounces on Friday. "NYMEX palladium stocks have been falling since 2014, and remain at low levels ... this suggests reduced availability of 'last resort' stocks while speculative positioning is closing in on record highs," said Standard Chartered in a note. "We forecast the palladium market to swing deeper into deficit this year, at 563,000 ounces, driven by continued growth in autocatalyst demand and lackluster supply."

Johnson Matthey , a leading manufacturer of vehicle

catalysts, forecast last month that the palladium market would show a deficit of 792,000 ounces in 2017. Overall, precious metals markets are waiting for the outcome of the Fed's meeting on Wednesday at 2 p.m. EDT (1800 GMT). Higher rates, as expected by the market, could boost the dollar, making commodities priced in the greenback more expensive for holders of other currencies.

Silver fell more than 1 percent to a 2-1/2-week low of $16.87 an ounce, while platinum was up 1.2 percent at


(Additional reporting by Nithin Prasad in Bengaluru; Editing by David Goodman and Steve Orlofsky)