Gold Prices Struggle as the Dollar Gains Appeal

NEW YORK ( TheStreet ) -- Gold prices closed lower Tuesday after waffling for most of the session as investors moved toward the safety of the dollar and left gold on the sidelines.

Gold for April delivery closed down $7.20 at $1,717.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,729.90 and as low as $1,713.80 an ounce while the spot price was shedding $6, according to Kitco's gold index.

Silver prices lost 37 cents to close at $33.34 an ounce while the U.S. dollar index was up 0.57% at $79.57.

Gold prices drifted lower on a credit downgrade from Moody's of six eurozone countries and the placement of France and the U.K. on credit watch negative. Gold came under some pressure after the downgrades bolstered the U.S. dollar's position as the currency of choice, but its selloff was somewhat limited as investors "bought the dip," and as Germany's economic sentiment index came in much higher than expected. Investors further dumped stocks for the dollar after January retail sales in the U.S. came in weaker than expected.

Gold "still looks range bound from $1,700 to $1,750," says George Gero, senior vice president at RBC Capital Markets, "as open interest is not building and the small margin decrease has not helped." The CME lowered the amount it costs to buy a gold futures contract on Friday by 12%, which is typically done to spur demand.

"A fall in price is unlikely," argues Commerzbank, "since it would appear that there is brisk interest in buying gold at around the $1,700 a troy ounce level."

Gold prices in yen were also up Tuesday after the Bank of Japan increased its asset purchase program, or QE, by 10 trillion yen. Many experts were surprised by the move and had expected the central bank to wait for further easing signals from the Federal Reserve, which would have devalued the dollar and boosted the yen. The yen has been a safe haven as interest rates are high in the country and as investors seek returns. The strong currency has been a drag on the country's growth and has hampered its ability to fight deflation.

Gold tends to find support when central banks try to pump more money into the system as the metal moves higher on inflation expectations and perceived weakness in paper currencies.

Another possible catalyst for gold this week might be a slew of economic data out of the U.S., which had been slated to be strong but today's retail sales number put a damper on that expectation. Better news might trigger a flight out of the U.S. dollar and into "riskier assets," while disappointing news would have the opposite effect. Gold will be at the mercy of those price fluctuations.

James Steel, analyst at HSBC, also said President Obama's unveiling of his fiscal budget could provide support for gold. Under Obama's plan the budget deficit is expected to grow more than $1 trillion for the fourth consecutive year. "The debt-to-GDP ratio is projected to continue to rise, at least in the short term," said Steel. "Gold tends to appreciate rapidly once US debt-to-GDP levels move sharply higher."

In order for the spotlight to be shown on the U.S., Europe must fade from the headlines -- a tall order considering the country still has not definitively secured its second bailout. Eurozone finance ministers still have to approve Greece's austerity program, which it was supposed to do tomorrow but the meeting has been postponed until Monday due to lack of information from the country on its planned 325 million euros in cuts. Another issue is if the newly passed austerity measures would be implemented regardless of which party wins the April elections.

Gold mining stocks were dragged lower Tuesday. Kinross Gold ( KGC) was down 1.15% at $10.32 while Randgold Resources ( GOLD) was 1.74% lower at $110.95.

Other gold stocks, Agnico-Eagle ( AEM) and Eldorado Gold ( EGO) were trading lower at $33.69 and $12.88, respectively.

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-- Written by Alix Steel in New York.

>To contact the writer of this article, click here: Alix Steel.

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