Gold drops below $890 as US dollar firms

Analysis

Gold extended losses on Tuesday and dropped below $890 an ounce after the US dollar gained on expectations of a possible interest rate hike, reducing the metal's appeal.

Gold fell to $889.80/890.70 an ounce from $894.00/896.00 late in New York on Monday,   when it jumped to its highest in almost two weeks to $908.70 before slipping back as the dollar regained strength and crude oil fell. Gold was well below its record $1,030.80 hit in mid-March. Jewelry makers were on the sidelines, waiting for prices to fall further, dealers said. "We'd expect to see very strong resistance at $900," said Louis Lok, a dealer at Bank of China in Hong Kong, adding gold could also test the downside of $885 due to a firm dollar. "If I were a physical buyer, this level is not low enough. Maybe at below $875 or $865,' said Lok, referring to levels which may attract buying from jewellers and other bargain hunters.

The dollar hit a three-month high against the yen and rose against other currencies after Federal Reserve Chairman Ben Bernanke said the rise in oil prices added to inflation risks, stoking expectations for rate hikes this year.

Oil was up 68 cents at $135.02 a barrel on Tuesday, having settled $4.19 lower the previous day. US crude jumped to a record $139.12 on Friday in its biggest one-day gain ever. "Short-covering and bargain-hunting should come around $880 and $16.50 for gold and silver respectively if there's any new wave of sell-offs," said William Kwan, bullion director of Gold Capital Management in Singapore. "But looking forward this month, a weak US economy will translate to a weak US dollar," he said.

Silver edged up to $17.07/17.14 an ounce from $17.06/17.16 late in New York on Monday, when it hit a high of $17.67 an ounce, its highest since May 27. Gold futures for June delivery GCM8 on the COMEX division of the New York Mercantile Exchange fell $4.4 an ounce to $893.7. "People seem to be reluctant to commit themselves to gold.

There's selling pressure but gold may find support at $885," said a physical dealer in Hong Kong. "I don't think jewellery makers are around. Maybe they will be happy to buy at below $880," he said. Premiums for gold bars were unchanged at between 30 and 40 US cents an ounce to the spot London prices in Hong Kong.

The most active Tokyo platinum contract for April 2009 delivery on the Tokyo Commodity Exchange fell ¥48 per gram to ¥6,826 despite a weaker yen, under pressure from a weak cash market. Spot platinum fell to $2,022/2,042 an ounce from $2,037.50/2,057.50 late in New York. Palladium firmed to $424.00/429.00 an ounce from $422.00/427.00.  (Reuters)

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