Gold fell to a two-week low in choppy trade on Friday, erasing gains as the dollar rallied on solid US jobs data and remarks by US Treasury Secretary Henry Paulson on the Chinese yuan.
Spot gold was last quoted at $624.40/625.90 an ounce by 4:27 pm in New York (2127 GMT), sharply lower than $630.90/632.40 late on Thursday. Gold, which has been moving in tandem with currency markets over the past several weeks, fell as dollar buying picked up after Paulson told CNBC television that China needs more foreign exchange flexibility.
"I believe very strongly that a strong dollar is in our nation's best interest and I feel very good about the strength of our economy right now," Paulson told a CNBC interviewer when asked whether he was worried about the slide in the dollar's value against the euro and other currencies.
Gold usually moves in the opposite direction of the dollar. A stronger greenback makes gold, which is priced in dollars, more expensive for holders of other currencies. "The dollar rallied on Treasury Secretary Paulson's comments, and it put the market, silver and gold, back on the defensive.
They just pretty much closely tracked the dollar," said David Rinehimer, director of commodity research at Citicorp Global Markets. Rinehimer said gold could move down toward the end of the year, usually a time when the dollar weakens and investors lock in profits.
Gold has had "a pretty good run up here since its October lows," he said. A.G. Edwards's commodities commentator James Quinn also said the back-and-forth trade in gold and silver was largely currency related. He said gold reversed course and fell sharply mostly because of the rising dollar after Paulson's remarks. Analysts said trading remained choppy because the market was less liquid ahead of Christmas holidays.
"I think we are going to see some choppy trading until year end unless we do get a big move in the dollar or the energy markets," Rinehimer said. "This is a very thin market. I wouldn't read very much into this. There is so little willingness by people to take positions or hold positions at the moment," said John Reade, head of metals strategy at UBS Investment Bank.
Some dealers expected gold to trade in a volatile $620 to $690 range until the end of the year. Gold has lost about 10 percent since rallying to a 26-year high of $730 in mid-May. Investment bank Merrill Lynch lowered its 2006 gold price forecast to $603 an ounce from $625, but left unchanged its prediction for 2007 at $675.
It said in a report that gold's supply-demand fundamentals remained positive over the medium term, and raised its 2008, 2009 and 2010 gold forecasts to $650, $625 and $600 from $600, $600 and $550 respectively. Gold's positive outlook in the long term has been prompting miners to reduce bullion hedging.
Nick Holland, chief financial officer of South Africa's Gold Fields Ltd, said he did not see the big hedge position at its newly acquired South Deep mine as existing for a long period.
In other precious metals, silver fell to $13.65/13.72 an ounce from $13.87/13.94 late on Thursday. Speculative buying from investment funds through silver exchange-traded funds has supported the metal, which rallied to a six-month high of $14.17 on Tuesday. Platinum fell to $1,105/1,110 from $1,122/1,127 an ounce, but was off a five-week low of $1,094. Palladium rose to $326/329 an ounce from $325/329.
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