Gold slides to 3-month low on dollar rise
NEW YORK/LONDON (Reuters) - Gold ended sharply lower after hitting a three-month bottom on Tuesday on the back of a firmer dollar, declining oil prices and weak sentiment ahead of an interest rate decision by the Federal Reserve.
Gold often takes its cue from movements in the dollar because of its role as an alternative investment to currencies, stocks and bonds. The outcome of the Fed meeting would set the tone for currencies and precious metals, dealers said.
"Strength in the U.S. dollar is clearly a major factor, plus we have seen a quite bit of money coming out of the StreetTRACKS exchange-traded fund. Both these things are weighing on the market," said Dan Smith, analyst at Standard Chartered Bank.
"There is some indication of consumers starting to come back in at these lower prices, but we are waiting to see how powerful that would be. I am looking for prices to recover somewhat from where we are now," he said.
Gold held in StreetTRACKS Gold Shares, the world's largest gold-backed ETF, fell more than 50 tons in less than a week to about 591 tons as of Monday.
Spot gold fell as low as $868.80 an ounce, the lowest price level since Jan 22.
It was at $873.55/874.75 at 2:15 p.m. EDT, against $891.65/892.65 late in New York on Monday, when it hit an intraday day high of $895.50 on speculative buying driven by record high oil.
Jonathan Jossen, independent floor trader in New York, said that gold's fundamentals remained firm in spite of a recent sell-off due to the dollar's strength.
"The only thing that I can see why gold should slip is that we get deeper into a recession, and maybe that will bring commodity prices down and bring inflation down," Jossen said.
The dollar hit its highest level against the euro in nearly four weeks, on track for its largest monthly gain in nearly a year, amid expectations the Federal Reserve will signal the end of its easing campaign.
The Fed will begin its two-day meeting later on Tuesday and analysts expect the policy-setting body to cut key borrowing costs by a quarter percentage point to 2.0 percent and indicate that its rate-cutting campaign is finished for now.
A firmer dollar makes gold costlier for holders of other currencies and often lowers bullion demand. The metal is also generally seen as a hedge against oil-led inflation.
Oil fell more than $3 a barrel, retreating further from a record high hit on Monday. U.S. crude futures ended down $3.12 at $115.36 a barrel.
FED DECISION AWAITED
George Gero, vice president with RBC Capital Markets Global Futures in New York, said that the Fed meeting will be closely watched. The U.S. central bank is expected to slash rate by 25 basis points to 2 percent on Wednesday.
Gero also cited a lower open interest in the U.S. gold futures market, larger gold delivery notices and chart-based selling below $880 an ounce for bullion's drop.
Spot gold has been trading well below its lifetime high of $1,030.80 an ounce hit on March 17, with attempts to revisit the level resulted in heavy profit-taking by investors.
U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange settled $18.70, or 2.1 percent, at $876.80 an ounce on Tuesday.
In industry news, Penoles (PENOLES.MX), Mexico's largest producer of refined silver, declined sharply on Tuesday, falling 6 percent one day after the company posted a slight drop in first-quarter net profit.
Silver fell to $16.48/16.57 from $16.96/17.02 an ounce late in New York on Monday.
Other precious metals also fell, with spot platinum dropped sharply to $1,909.50/1,929.50 an ounce from $1,964.50/1,974.50, while palladium dropped to $419/427 an ounce from $432.50/438.50 in the U.S. market late on Monday.
