US gold futures finished down but off their lows on Friday, hurt by a dollar rally after a report showed signs of US consumer inflation, slashing expectations of more aggressive rate cuts from the Federal Reserve.
Even though rising consumer and wholesale prices should boost gold's appeal as a hedge against inflation, bullion's near-term direction could hinge on the strength of the dollar, which has been rising this week on the outlook of a more resilient US economy, market watchers said.
Most-active February gold on the COMEX division of the New York Mercantile Exchange settled down $6.00 at $798.00 an ounce. It hit a high of $808.50 and a bottom of $792.30, which marked the weakest level since December 6.
The dollar surged 1.5 percent versus the euro, the highest since late October, after a government report showed that consumer prices jumped 0.8 percent in November, the sharpest climb in more than two years and driven by surging energy costs.
"I am impressed with how gold is acting in the face of the stronger dollar," said Greg Orrell, portfolio manager, OCM Gold Fund in Livermore, Calif. Orrell, whose fund has about $150 million assets under management, said that even though US prices were rising, the Fed would be handcuffed to fight inflation due to its resolve to boost the economy, and gold should benefit from inflation then.
On Thursday, gold futures finished nearly 2 percent lower, also hit by a stronger dollar after data showed higher-than-expected retail sales and wholesale inflation. The report on Thursday also showed that prices received by US producers surged actedly steep 3.2 percent, the biggest increase in 34 years.
Gold's recent decline was also due to a drop in energy prices, as the yellow metal is often used by investors as a hedge against oil-led inflation. US crude futures finished 1 percent lower at just above $91 a barrel, after flirting with $100 just two weeks ago.
"Crude oil's down. But I think that gold has been more focused on the dollar recently, more so than what's been going on in the energy markets," said David Rinehimer, director of Citi Futures Perspective in New York. Rinehimer said that if inflation data boosts real interest rates, then that would be supportive to the dollar and would also trigger selling pressure in the gold market.
A higher dollar makes gold, which is denominated in the greenback, more expensive for investors holding other currencies. Gold is also viewed as an alternative currency to the US dollar. Barclays Capital in London told clients in a note that gold prices were particularly supported by the long-term weakness of the dollar and mounting inflationary fears.
"For precious metals, a potential US slowdown and the development of wider credit market fears in general add to an existing raft of price-positive factors for precious metals," Barclays said. COMEX estimated final gold futures volume at a light 98,046 contracts, with gold options at 8,357 lots. Total turnover in Chicago Board of Trade electronic 100-oz gold futures was 24,534 lots at 2:51 pm EST (1951 GMT) http://www.cbot.com/cbot/pub/page.
At 2:15 pm, spot gold was quoted at $792.70/793.50 an ounce, compared with $797.10/797.80 in New York Thursday afternoon. London bullion dealers fixed the afternoon spot reference price at $789.50. COMEX March silver finished down 25.40 cents or 1.8 percent at $13.983 an ounce, trading between $13.870 and $14.350.
Spot silver was quoted at $13.80/13.85 an ounce, compared with $14.08/14.13 late Thursday in New York. London silver was fixed at $14.010. NYMEX January platinum ended up $7.60 at $1,479.20 an ounce. Spot platinum was quoted at $1,475/1,480. March palladium closed up $5.60 or 1.6 percent at $357.40 an ounce. Spot palladiumfetched $352/356.