* Weak U.S. housing data prompts selling across the board
* SPDR gold ETF holdings hit record 1,313.135 T
* Coming up: US Fed interest rate decision 2:15 p.m. EDT
(Recasts, updates prices, adds comments, second byline, dateline)
By Frank Tang and Jan Harvey
NEW YORK/LONDON, June 23 (Reuters) - Gold fell but off early session lows on Wednesday as weak U.S. housing data painted a bleak picture for economic recovery, triggering broad-based selling ahead of the Federal Reserve's interest rate decision.
Solid gains in the holdings of the world's largest gold-backed exchange traded funds suggested investment demand will provide underlying support, and price volatility could remain elevated due to near record COMEX open interest.
In early trade, the metal hit its lowest in more than a week after a report showed sales of new U.S. homes dropped a record 32.7 percent in May to the weakest level in at least four decades. [
]James Steel, chief commodity analyst at HSBC, said that the U.S. economic news led to liquidation in gold and selling across different asset markets under thin volume.
"The knee-jerk reaction for gold was to sell off but it has been gradually paring loses. I do think that the World Cup has reduced some trading activity," Steel said.
Spot gold <XAU=> was at $1,231.65 an ounce at 12:06 p.m. EDT (1606 GMT), against $1,239 late in New York on Tuesday, having slipped to a one-week low of $1,224.30 an ounce.
U.S. gold futures for August delivery <GCQ0> fell $8.20 to $1,232.60 an ounce.
Gold was pressured by the dollar strength and caught up in selling of other assets as equity markets slipped after the disappointing home sales data, with oil <CLc1> and Reuters/Jefferies CRB index <.CRB> also dropping.
"There is (weakness) not just across commodities but across all markets," said RBS analyst Daniel Major. "In terms of gold, there is a slightly more risk-off tone today, which seems to have resulted in dollar strength and... that has weighed on gold."
Oil prices also fell by more than $2 toward $75 a barrel after after government data showed U.S. crude stocks rose sharply last week and the International Energy Agency forecast supplies would be comfortable for five years. [
]The usual inverse relationship between gold and the dollar, which weakened at the beginning of the year as both rose on risk aversion, seems to be re-established, Major said.
The dollar rose 0.2 percent versus the euro <EUR=> on Wednesday and climbed by a similar amount against a basket of six other currencies.
Among other precious metals, silver <XAG=> fell to $18.38 from $18.74, platinum <XPT=> was at $1,558.30 an ounce versus $1,582.50, and palladium <XPD=> at $469.93 against $481.50.
FED EYED
Volume was lower than usual as some traders opted to stay on the sidelines ahead of the Federal Reserve's policy statement later in the day. The bank is expected to keep rates on hold near zero.
"The accompanying statement by the U.S. central bank is eagerly awaited," said Commerzbank in a note. "Should interest rates be kept at a low level long term, the U.S. dollar could come under pressure and this could generally support gold."
Gold also benefits from persistently low interest rates, because they keep down the opportunity cost of holding non-interest bearing assets such as bullion.
Investment in gold ETFs climbed, with the SPDR gold ETF noting a 5-tonne rise in its holdings to record highs at 1,313.135 tonnes on Tuesday. [
]In a note, Erste Bank forecast significant further upside for gold on the back of its appeal as a haven from risk and as protection from future inflation and currency market volatility. It said gold could reach $2,300 an ounce in the long term.
"In periods where black swans (unexpected crises) are no singular occurrences but are practically coming in flocks, the status of gold as a safe haven has yet again proven its worth," the bank said. Prices at 12:23 p.m. EDT (1623 GMT)
LAST NET PCT YTD
CHG CHG CHG US gold <GCQ0> 1231.70 -9.10 -0.7% 12.4% US silver <SIN0> 18.420 -0.482 -2.6% 9.3% US platinum <PLN0> 1563.00 -30.00 -1.9% 6.3% US palladium <PAU0> 474.55 -15.40 -3.1% 16.1% Gold <XAU=> 1230.50 -8.50 -0.7% 12.2% Silver <XAG=> 18.40 -0.34 -1.8% 9.3% Platinum <XPT=> 1558.30 -24.20 -1.5% 6.3% Palladium <XPD=> 469.93 -11.57 -2.4% 15.9% Gold Fix <XAUFIX=> 1226.50 -16.50 -1.3% 11.1% Silver Fix <XAGFIX=> 18.91 28.50 1.5% 11.3% Platinum Fix <XPTFIX=> 1575.00 3.00 0.2% 7.4% Palladium Fix <XPDFIX=> 485.00 1.00 0.2% 20.6% (Reporting by Jan Harvey and Frank Tang; Editing by Lisa Shumaker)