Gold price drops almost 2% as dollar rally continues

New York (May 26)  Gold dipped almost 2% on Tuesday as the dollar extended gains following a raft of strong US data and recent comments from Federal Reserve Chair Janet Yellen that reinforced the central bank’s tightening bias on monetary policy.

Spot gold dropped to a two-week low of $1,185.35 an ounce earlier and was down 1.6% at $1,187.59 by 2.13pm GMT.

US gold futures for June delivery were down $16.70 at $1,187.30 an ounce.

The dollar continued its strong run, up 1.2% against a basket of leading currencies, after data showed US business investment spending plans increased solidly for a second straight month in April.

Separately, new US single-family home sales rose more than expected in April and consumer confidence rose in May.

Tuesday’s data added to optimism after strong inflation numbers on Friday and Fed Yellen’s comments that interest rates will be raised this year as the US economy was set to bounce back from an early-year slump.

A stronger dollar makes gold more expensive for holders of other currencies, while higher US interest rates would dent demand for the non-interest-paying metal, increasing the opportunity cost of holding it.

"The next big data release from the US or the next confirmation of an interest rate hike, whenever that will come, I think that’s when we are going to see the final washout in gold," Mitsubishi strategist Jonathan Butler said.

Gold’s inverse correlation with the dollar has started to strengthen again, and weaken against yields, Barclays said in a note.

"We maintain the view that the third quarter is likely to be the weakest quarter for gold, given that we expect the Fed to start increasing rates in September, but the potential downside is likely to be limited," it said.

Bullion traders will be keenly eyeing US economic data due later in the week, for further clues on the strength of the economy and how it would impact the Fed’s monetary policy.

The focus was also on Greece, which said on Monday it needed aid urgently to be able to pay a loan instalment due next week.

Any worsening of the Greek debt crisis could potentially trigger demand for gold coins and bars. The metal is usually seen as a hedge against political and financial risk, although the impact on demand for metals from wider political worries is usually short lived.

Silver fell 2.2% to a two-week low of $16.62 an ounce. Platinum dropped 2.1% to $1,123.49 an ounce and palladium slipped 0.3% to $783.47 an ounce.

Source: Reuters