Gold Prices Slammed as Dollar Pops

Gold prices sold off Tuesday on a stronger U.S. dollar.
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Gold prices

fell hard Tuesday on renewed confidence in the U.S. dollar, which led a rotation into the currency and Treasuries.

Gold for December delivery shed $36.10 to $1,336 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Tuesday has traded as high as $1,371.70 and as low as $1,332.50.


U.S. dollar index

was adding 1.66% to $78.21 while the euro was down 1.28% to $1.37 vs. the dollar. The spot gold price Tuesday was losing $36.90, according to Kitco's gold index.

Gold prices came under pressure Tuesday as U.S officials gave hints that the dollar's appreciation would be orderly and cause minimal fluctuations in the currency market.

The U.S. garnered some criticism from the World Bank which said that monetary easing in the U.S. was driving up the value of emerging market currencies and hampering their ability to compete in the export market. Thailand, Brazil and Japan have all been taking steps to control the rapid appreciation of their currencies.

U.S. officials, led by Treasury Secretary Tim Geithner, have promised that the government would not allow the dollar to decline in value for selfish export gain to jump-start the struggling economy. His comment came ahead of the Group of 20 meeting in South Korea this weekend where finance leaders will no doubt be discussing the emerging currency wars.

While the U.S. is taking heat for its falling currency, China is also being pressured to let its currency rise in value. The yuan has only risen 2% since June when the country said it would let its currency appreciate in value.

The currency debate has taken center stage as the

Federal Reserve

has all but given the green light to more monetary easing. The worry previously was that the Fed would raise its long-term inflation target, which would mean more money printing for a longer period of time. However, now expectations have been somewhat dampened and gold prices have come under pressure.

"I think that plan is going to be a little bit smaller than expected or its going to be spread out over different Fed meetings where the Fed is going to target specific quantities of Treasuries," says Phil Streible, senior market strategist at Lind-Waldock. "Now that the facts are starting to spill out we're starting to sell off and lose some steam."

Investors had been buying gold as protection against future inflation. As each dollar is worth less, gold becomes the safest way to preserve wealth. With inflation fears tempered for now, investors have been selling some of their gold positions. Technical trading and short-covering on the dollar have also dominated precious metal trading and this inverse correlation is expected to continue in the short term.

"I think the dollar is a very undervalued asset," says Streible. "I think ultimate weakness

for gold is around $1,327."

Gold was also coming under pressure Tuesday after the People's Bank of China raised its key benchmark interest rate by 25 basis points. It is another step by China to take money out of circulation to control inflation. Less money means less purchasing power which could hurt gold demand in one of the leading consumer countries.

Many traders are staying in a wait-and-see mode when it comes to gold. Modest bargain-hunting has been supporting higher prices, but $1,400 is still a long way off. Streible says gold needs a string of bad news like surprisingly weak initial jobless claims to push prices to $1,400 in the short term. Tuesday's double-digit selloff could also be triggering stop loss orders in which traders are forced to sell their gold positions once the price reaches certain levels to lock in gains.

Investors not only seemed to be buying the U.S. dollar but also Treasuries, the yield on the 10-year note fell to 2.48%. If there is a lot of investor interest, the yield falls because the government doesn't have to sweeten the pot to entice people to lend it money. The yield had risen in recent weeks on QE2 speculation.

Silver prices

settled down 63 cents to $23.78 while copper lost 9 cents at $3.75. Silver and copper were also getting hit by China's rate increase. The country has been credited with leading the global economic recovery and its latest attempt to cool growth has investors worried that China might slow too quickly. Concerns over future lack of demand for industrial metals were weighing on prices.

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Written by Alix Steel in New York.

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