* Markets gear up for Fed policy meeting this week
* Money managers cut net gold, silver long positions
* GRAPHIC-2017 asset returns: http://tmsnrt.rs/2jvdmXl (Recasts, updates prices; adds comment, NEW YORK dateline)
By Renita D. Young and Jan Harvey
NEW YORK/LONDON, Dec 11 (Reuters) - Gold steadied below $1,250 an ounce on Monday after its biggest weekly drop in more than six months as markets anticipated an interest rate hike from the U.S. Federal Reserve this week.
Spot gold XAU= was down 0.2 percent at $1,244.77 per ounce by 1:58 p.m. EST (1858 GMT), while U.S. gold futures GCv1 for February delivery settled down $1.50, or 0.1 percent, at $1,246.90 per ounce.
Spot prices fell 2.5 percent last week, their biggest weekly drop since May.
The Fed is expected to lift rates at its two-day policy meeting ending on Wednesday, but its accompanying statement will be closely watched for any surprises.
"The question is going to be what the forward guidance will be," said Bart Melek, head of commodity strategy at TD Securities in Toronto. "Do they get more hawkish, less hawkish, address inflation, and what will the economic outlook be?
"If comments come in on the dovish side, then gold will rally," Melek added.
Markets are also anticipating comments on the pace of future rate hikes. Another two or three are expected in 2018, although still-sluggish inflation and wage growth have raised question marks over that view.
Gold is highly sensitive to rising U.S. interest rates, as these increase the cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
In the wider markets, world stocks rose and equity volatility neared a record low ahead of a raft of central bank rate decisions, while newly launched bitcoin futures shot above $18,000. MKTS/GLOB
Hedge funds and money managers sharply reduced their net long positions in COMEX gold and silver contracts in the week to Dec. 5, U.S. data showed on Friday. CFTC/
Net positions in silver took their largest drop on record, by 34,915 contracts, Societe Generale (PA:SOGN) said in a report.
"Financial investors were downright fleeing from silver," Commerzbank (DE:CBKG) said in a note. "The silver price has suffered disproportionate losses since mid-November, as is also reflected in the gold/silver ratio, which climbed last week to over 79."
Silver XAG= was down 0.5 percent at $15.76 an ounce.
"Supplies are high, and demand is low," said Phillip Streible, senior market strategist at RJO Futures in Chicago. "Other metals have done better, like palladium."
The platinum discount to palladium widened to around $120 on Thursday, the steepest since April 2001. L1N1O7296
Palladium XPD= was up 0.2 percent at $1,008.70 an ounce, while platinum XPT= was up 0.3 percent at $889.80 an ounce after touching its lowest since February 2016 last week.
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