By Sethuraman N R

Jan 19 (Reuters) - Gold prices edged down on Thursday on a strong dollar after Federal Reserve Chair Janet Yellen advocated lifting U.S. interest rates gradually.

Spot gold was down 0.1 percent to $1,202 per ounce by 0335 GMT, after dropping to as much as $1,197.31. The bullion hit an eight-week high of $1,218.64 on Tuesday.

U.S. gold futures had fallen as much as over 1 percent to $1,197.10.  The dollar index, which measures the greenback against a basket of currencies, rose 0.3 percent to 101.200.

"There is no change in Fed's stance about rate hikes, which is in line with market expectations," said Mark To, head of research at Hong Kong's Wing Fung Financial Group.

With the U.S. economy close to full employment and inflation headed toward the Federal Reserve's 2 percent goal, it "makes sense" for the U.S. central bank to gradually lift interest rates, Fed Chair Janet Yellen said on Wednesday.

Dallas Fed President Robert Kaplan on Wednesday joined the chorus of central bank officials making a case for a gradual hike in U.S. interest rates.

U.S. consumer prices increased in December as households paid more for gasoline and rental accommodation, leading to the largest year-on-year increase in 2-1/2 years and signaling that inflation pressures could be building.

Positive data usually puts pressure on gold prices, because investors raise bets on a U.S. interest rate hike that would increase the opportunity cost of holding non-yielding bullion.

"We can still say there is an inverse relation between dollar and gold as we are waiting to hear from Trump on his policies. We can expect random shocks from him," To said.

"There should be some consolidation around the $1,200 levels for sometime. We need to wait and see if there are any spectacular things that Trump has to say."

U.S President-elect Donald Trump, who is swore in on Friday, has called for tax cuts and more infrastructure spending which has boosted U.S. shares and the dollar and seen a sell-off in Treasuries. His protectionist statements and off-the-cuff Tweets have led many investors to opt for gold.

Gold, considered a safe-haven investment during times of geopolitical and financial uncertainty, has risen more than 7 percent since dropping to a more than 10-1/2-month-low in December.

Silver fell 0.3 percent to $16.97 an ounce.

Platinum fell 0.5 percent to $956.50, while palladium was down 0.1 percent to $747.70.

(Reporting By Nallur Sethuraman in Bengaluru; Editing by Amrutha Gayathri and Michael Perry)

© Reuters News 2017