Gold Price Falls on Dollar Strength, Fed Rate Worries

New York (July 30)  Gold futures drummed a retreat on Thursday as some investors adjusted their outlook on U.S. interest rates while others sold precious metals amid pressure from a stronger dollar.

The most actively traded contract, for December delivery, fell $4.60, or 0.4%, to settle at $1,088.70 a troy ounce on the Comex division of the New York Mercantile Exchange.

Prices have been hitting five-year lows as traders shed gold in anticipation of higher interest rates from the Federal Reserve. The U.S. central bank is widely expected to raise borrowing costs this year, the first such increase in nearly a decade. Gold doesn't pay interest or dividends, and is expected to struggle to compete with bonds and stocks that do when rates go up.

The monetary policy shift is also likely to boost the dollar, making dollar-denominated gold more expensive for investors who use weaker currencies.

On Thursday, gold prices fell in response to a stronger dollar, which rallied against other currencies. The ICE Dollar Index, which tracks the dollar against a basket of foreign currencies, rose 0.6% at 97.56. Gold is traded in dollars and becomes more expensive for investors who use weaker currencies to fund their purchases.

"Gold has been acting and reacting to the dollar," said Paul Nolte, portfolio manager at Kingsview Asset Management.

Gold prices pulled lower as investors recalibrated their interpretation of the Federal Open Market Committee's policy statement, which was released Wednesday afternoon. While traders initially viewed the communiqué as dovish-because officials said stubbornly low inflation could delay rate increases-investors later turned their focus to officials' upbeat assessment of the economy.

"The Fed has been promising a rate increase now for, really, 12 months, and they've been going through great pains to get the market ready for it," Mr. Nolte said.

Fed officials have three more scheduled policy-setting meetings this year, with the next one set for September.

"It's really a question of when interest rates in the U.S. go up, not if they will go up, and gold is having a very tough time with that," said Ira Epstein, a broker with Linn & Associates in Chicago.

Prices briefly rose after a report showed the U.S. economy expanded at a slower-than-expected pace in the first quarter. Gross domestic product, the broadest measure of all the goods and services produced by the economy, rose 2.3% in the second quarter, lagging the 2.7% growth in output economists expected.