LONDON, Aug 8: Gold fell on Wednesday as the dollar gained after the US Federal Reserve's policy statement cooled expectations for a rate cut in the coming months. Sentiment was down because of recent gold sales by European central banks, but long-term players remained positive about gold's future and invested more in exchange traded funds (ETFs).

Spot gold fell as low as $669.50 an ounce and was quoted at $670.40/671.00 at 1012 GMT, from $672.10/672.90 late in New York on Tuesday.

David Holmes, director of precious metals sales at Dresdner Kleinwort, said there was scope for additional gold buying as it was trading above its recent pivot of $665 and bullish positions on the futures markets had fallen sharply.

The gold price is actually very well positioned for a rally in the later part of the year,” Holmes said.

A firmer dollar makes gold costlier for other currency holders and often lowers bullion demand.

But it reiterated that controlling inflation remains its number one policy concern and said that despite the increase in risks to growth, the economy was still likely to expand at a moderate pace in coming quarters.

Analysts said gold sales by central banks also weighed on bullion prices.

The Bank of Spain sold 0.8 million troy ounces or 24.8 tons of gold in July. Between March and May, the central bank sold 3.5 million ounces of gold but it took a break in June.

Analysts said the bank has sold 134 tons so far in 2007.

Italy's Prime Minister Romano Prodi said he was pleased there was a discussion on possible sale of some of the country's gold reserves.

Central bank sales are still creating some negative sentiment and with only a few weeks left of the current year of the CBGA, banks are likely to remain on the offer, said James Moore, analyst at TheBullionDesk.com, referring to the Central Bank Gold Agreement.

Investment demand is still strong, though, as reflected by the rise in ETF holdings, and is likely to provide scaled down support in the coming sessions, but overall with volumes quite thin the metal is likely to remain rangebound.

Platinum fell to $1,281/1,285, from $1,281/1,284 an ounce in New York, while silver fell to $13.01/13.05 an ounce from $13.05/13.10. Palladium was up $1 at $360/363.—Reuters