LONDON, June 10: Gold extended losses in Europe on Tuesday as the US dollar firmed on speculation an increased focus on inflation by the Federal Reserve may lead to a hike in US interest rates later this year.
Such a move could halt the dollar’s fall, denting gold’s appeal as an alternative investment to the US currency.
Gold fell to $883.10/884.10 an ounce from $894.00/896.00 late in New York trade on Monday.
Bullion, in line with other dollar-priced metals, has been sold as the firmer greenback made it more expensive for holders of other currencies.
Gold has got caught up in a broader commodities liquidation, said Simon Weeks, director of metals trading at the Bank of Nova Scotia. With the authorities increasing interest rates, you would expect commodities to come off.
Weakness in the dollar, which also spurs buying of gold as a currency hedge, was a primary factor in pushing the precious metal to a new all-time high of $1,030.50 an ounce earlier this year.
But the dollar has received a boost over the last week from the Federal Reserve’s increased focus on inflation, which has raised expectations a rate hike may be forthcoming.
The greenback strengthened broadly on Tuesday after a warning from Fed Chairman Ben Bernanke on the risks of rising prices and after Treasury Secretary Paulson declined to rule out intervening in the currency markets to stabilise the dollar.
If rates were raised to counter inflation, the dollar would be likely to benefit, pressuring gold. However, uncertainty over the outlook for the US currency is still limiting losses.
We are getting to the point where the risk-reward ratio is strongly in favour of the dollar to the upside, but the market is going to be cautious about that view, said JP Morgan analyst Michael Jansen, adding that the European Central Bank is in fact in a better position to raise its rates than the Fed.
In addition, increased worries about inflation are likely to underpin gold prices in the longer term, Jansen added, as the precious metal is typically bought as a hedge against rising prices.
The broad dollar background is not very friendly but there is a big focus on inflation which is intrinsically supportive of gold, he said.
Spot platinum meanwhile slipped to $2,001/2,011 from $2,037.50/2,057.50 late in New York, largely tracking gold and other markets.
In the absence of demand and supply news, platinum is drifting along with financial market sentiment, said Standard Bank in a note. Among other precious metals, palladium was flat at $422.00/427.00, while silver was trading at $16.98/17.05 against $17.07/17.14.—Reuters