Gold Prices Drop; Dollar Rises vs. Euro

Gold prices took yet another beating Thursday as the U.S. dollar strengthened.

June-dated bullion futures were down $10.30 at $854.80 an ounce in recent action on the Comex division of the New York Mercantile Exchange.

The value of gold has dropped from its all-time high around $1,030 an ounce on March 17, when troubled investment bank Bear Stearns(BSC Quote) was rescued by JPMorgan Chase(JPM Quote) and investors scrambled for safe-haven investments. Since then, worries about the U.S. economy and financial system have receded somewhat and investors have dumped their bullion holdings.

"The markets are treating May/June [dates] as the pivot point beyond which they can no longer reliably depend on ever cheaper dollars to fuel speculative binges in commodities," writes Jon Nadler, a metals analyst at Montreal-based bullion dealer Kitco.

Over time, the value of the U.S. currency and the price of dollar-denominated commodities such as gold tend to move in opposite directions.

In the overnight session, the price traded as high as $883.60 on word out of the Middle East that a number of unidentified Gulf States are considering dropping their peg to the U.S. dollar.

A switch away from the dollar by oil-rich countries could reduce demand for the greenback, leading to a further fall in an already relatively weak currency. So any speculation of a change in policy tends to cause volatility in the foreign-exchange market and in the prices of dollar-denominated assets.

"It's not brand-new news, but it's coming from a more official source, the Kuwaiti finance minister," says Andy Montano, director of precious metals at Toronto-based bullion bank ScotiaMocatta.