Strong dollar hammers gold, silver

The metals sink as a rallying US currency drags down commodity prices.

By TheStreet Staff Jun 23, 2011 11:51AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet

 

Updated at 2:45 p.m. ET

 

Gold and silver prices tanked in a broad commodity selloff, as an increasingly dour economic outlook and a stronger U.S. dollar weighed on markets.

 

Gold (-GC) for August delivery shed $32.90, or 2.1%, to settle at $1,520.50 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,549.60 and as low as $1515 on heavy volume, while the spot gold price was last down more than $32, according to Kitco's gold index.

 

Silver (-SI) prices tumbled $1.74, or 4.7%, to close at $35 an ounce. The U.S. dollar index was rallying 0.9% at $75.61, while the euro was losing 1.2% against the dollar. Oil prices were also in free fall, dropping $4.30 to $91.09 a barrel after the International Energy Agency announced it would release emergency stockpiles.

 

"Investors are selling higher yielding assets" and headed back to the dollar says Phil Streible, senior market strategist at Lind-Waldock. The lack of additional stimulus from the Federal Reserve was propping up the dollar, and the central bank's downgrade of the U.S. economy was spurring a flight to safety, a lucrative combination for the currency.

There is also continued uncertainty surrounding the eurozone's ability to bailout Greece for the second time. The country's fate is now in the hands of the Greek parliament, which needs to pass further austerity measures by the end of June to secure more funding. EU finance ministers are starting a two-day meeting to try to wrestle the Greece debt crisis into submission and come up with a strategy to avoid a default.

 

To top it off, HSBC said that its index of manufacturing activity in China dropped to 50.1 in June compared to a 51.6 reading in May, confirming fears of a slowdown in the country. All of these factors were leading to broad-based panic selling, especially in asset classes like gold that have performed well recently.

 

Streible says "gold should be down $50, the fact that it is down $30 isn't terrible." Streible says this is more of a pro-dollar selloff than an anti-gold selloff, and he expects haven demand to kick back in.

 

Gold broke above, but couldn't hold, the $1,550 area Wednesday, which also prompted traders to sell the metal to lock in profits. These new levels should attract buyers, argues Streible, but a break below $1,480 would lead to a strong reversal in gold. "We will see investors come back in. Gold is accelerating against other currencies like the euro, and against sterling it's doing fantastic."

Gold is a preferred haven asset versus the euro as sovereign debt fears remain, and gold trumps British sterling as the Bank of England hinted at more stimulus in its last central bank meeting Wednesday.

 

Gold mining stocks were getting punished along with broader equities. Barrick Gold (ABX) was tanking 3.5% to $43.20 while Newmont Mining (NEM) was falling 1.7% to $53.15. Goldcorp (GG) was losing 3.3% at $47.88, and AngloGold Ashanti (AU) was tumbling 5.2% to $40.44.

 

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