Precious metals fell sharply on Thursday, as a rally in the dollar against major currencies dampened their appeal as an alternative investment. Declining oil prices also hit market sentiment, with gold falling more than 2 percent to a two-week low, platinum slipping over 4 percent to touch a three-week trough and silver shedding 3.8 percent in choppy trade.
Spot gold fell as low as $879.05 an ounce and was quoted at $883.60/884.25 at 1414 GMT, down from $899.65/901.05 in New York late on Wednesday. "The weakness is across the board but on the precious side, it's more of a dollar thing," said Jeremy East, head of metals trading at Standard Chartered Bank.
"The markets are feeling that the US economy is probably going to remain slow because of the housing issues. There's a general expectation that the Federal Reserve may have to start hiking interest rates at a time when the economy is still weak."
The dollar rose against a basket of major currencies after hawkish Federal Reserve comments prompted a jump in short-dated US bond yields, lifting demand for assets denominated in the US currency.
The US currency was also bolstered after US durable goods data came in less weak than expected, quelling some jitters about US economic health. Retreating oil prices also offered broad dollar support. A firmer dollar makes gold costlier for holders of other currencies and often lowers bullion demand. The metal is also generally seen as a hedge against oil-led inflation.
Oil fell to below $129 a barrel on signs that a demand slowdown in some markets may spread as major Asian consumers review their fuel subsidy policies. Prices have fallen from a record high above $135 hit last week. "The dollar is substantially stronger and that has had an impact on the price," said David Holmes, director of precious metals sales at Dresdner Kleinwort.
Gold's advance earlier this month to last week's peak above $935 on the back of record oil prices blunted physical demand for the metal. But demand should heat up again if prices stay under $900, which has been a psychological support level. "Physical demand for gold is definitely returning to the market, certainly sub-$900, and that interest just grows as we approach $850," Holmes said.
In other markets, gold futures for June delivery on the COMEX division of the New York Mercantile Exchange were down $17.60 an ounce at $882.70 Platinum fell to a low of $1,967 an ounce, its lowest since May 8, and was last quoted at $1,991.50/2,011.50, against $2,059/2,079 in New York late on Wednesday.
"Platinum has done really well over the last six months but the dollar's strength could be leading to some profit taking," said BNP Paribas analyst David Thurtell. The market ignored reports that power problems in South Africa, the world's largest platinum producer, would continue for years.
Eskom, which produces about 95 percent of South Africa's electricity, has rationed power through a process called load-shedding since January, when the national grid virtually collapsed and millions were plunged into darkness.
Large gold and platinum mines shut down for five days. Spot silver slipped to $16.93/16.99 an ounce from $17.37/17.43, while palladium fell to $427.50/435.50 from $432/$440.
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