Comex gold futures closed lower on Wednesday, undermined by the strength in the dollar which added to its gains after an unexpected surge in US industrial output reinforced expectations of robust economic activity, traders said.
The dollar rallied about 1 percent against the euro on Wednesday, when the healthy output data suggested that the Federal Reserve would have the latitude to increase interest rates aggressively if necessary.
A rising dollar erodes profits in dollar-denominated assets like gold for overseas investors.
August gold fell $3.50 to close at $385.20 an ounce, in a session range of $383.90 to $387.40.
Estimated final gold volume was 38,000 lots, less than the 48,609 lots that traded on Tuesday.
The vigorous pace of industrial production caused some traders to speculate that the Fed may have more room to tighten credit if it wishes.
"Yet another bullish number for the US economy. With the dollar strengthening up again, were right back down to where we were yesterday," said one New York gold dealer.
Gold gave back day-earlier gains won when Fed chairman Alan Greenspan suggested that the Feeds tightening credit policy would be carried out in a measured way, traders said.
But the economic strength implied by the surge in manufacturing activity meant that gold's value as a safe-haven play was becoming less necessary.
US may industrial production rose 1.1 percent, well above analyst's forecasts for a rise of 0.8 percent and above the 0.8 percent output increase in April.
Analysts said the report indicated a solid pickup in business investment was showing through on the production side.
Strong economic growth can undermine investment in gold as a safe-haven play.
Spot gold ended at $384.50/5.00 an ounce, down from $388.75/9.50, on Tuesdays late quote in New York.
On Wednesdays afternoon fix in London was at $385.25 an ounce.
Traders said technical as well as fundamental factors have begun to influence gold's levels, with resistance unbleached.
"When you look at the charts $390 (an ounce) is pretty solid resistance right now. It looked like it was going to go overnight, but it proved to stay in place. I think threes some pretty good selling building up over $390," a gold dealer.
Gold touched a 15-year high at $433 at the start of April, before the metal slumped as low as $372.50 in May.
Analysts pinpoint support in August gold at $383.20, $382.90 and the May 10 low at $372.50, with resistance above $390.00, followed by $396.10 and $399.80.
Comex July silver tumbled along with gold though pared most of its losses.
July finished 1.0 cent lower at $5.7250 an ounce, in a range from $5.6350 to $5.7350.
Spot silver was nearly even at $5.71/73, off $5.71/74 an ounce late on Tuesday. On Wednesdays fix was $5.65.
Nymex July platinum was up $3.50 at $776.50 an ounce. Spot platinum firmed to $777.00/782.00 from $771.00/775.00 late on Tuesday. Thinly traded September palladium was down $1.75 at $221.70 an ounce.
Spot palladium was higher at $220.00/225.000 than $215.00/220.00 late on Tuesday.