Gold pulls back below $850 as dollar strengthens

By Moming Zhou, MarketWatch January 05, 2009

NEW YORK (MarketWatch) -- Gold futures fell below $850 an ounce Monday, keying in part on losses in crude oil, as a rising U.S. dollar reduced the metal's investment appeal.

Gold for February delivery was last down $32.50, or 3.7%, at $847 an ounce on the Comex division of the New York Mercantile Exchange. It dropped as far as $843.50 earlier, the lowest since Dec. 25.

he dollar rose against its major rivals to start the first full trading week of 2009, with the dollar index (DXY: 82.79, +0.95, +1.2%) up 0.5%. The greenback and gold prices tend to move in opposite directions.

"Gold headed lower as the dollar surged," said analysts at Action Economics. Also, "gold prices will remain sensitive to movement in oil."

The greenback rose despite "the lack of an obvious trigger," said Marc Chandler, a currency strategist at Brown Brothers Harriman. The magnitude of the gain was unexpected, he added.

The dollar's upward trend, however, could lose steam depending on Federal Reserve monetary policy, analysts said. The Fed has already lowered benchmark rate to a range between 0.5% to zero percent.

Charles Evans, president of the Federal Reserve Bank of Chicago, said over the weekend that based on the outlook for rising unemployment, falling industrial production and a wider output gap, economic models suggest rates should be below zero, according to Reuters reports.

In energy trading, crude futures fell for the first time in three trading days, after having risen to the highest in three weeks in the previous session. Weaker oil prices tend to reduce gold's appeal as a hedge against inflation.

In other metals trading Monday, March copper fell 2% to $1.4325 a pound, April platinum lost 2.1% to $927 an ounce and March palladium fell 4.2% to $184.15 an ounce. Silver for March delivery did worse still, tumbling 6.4% to $10.75 an ounce.

In gold spot trading, the London gold-fixing price -- a benchmark for gold traded directly between big institutions - stood at $860 an ounce Monday morning, down $14.50 from Friday afternoon.

oldings in the SPDR Gold Trust (GLD: 84.01, -2.22, -2.6%) , the largest exchange-traded gold fund, stood at 780.23 tons Friday, unchanged from a day ago and up 22.11 tons from a month ago, according to the latest data from the fund.

Moming Zhou is a MarketWatch reporter based in New York.

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