Gold prices drift lower as rising dollar, economic concerns trim earlier gains

January 13, 2009

By Sara Lepro

NEW YORK (AP) - Gold prices ended trading slightly lower Tuesday, giving up some earlier gains, as a strengthening dollar kept the commodity's advance in check.

Oil prices rebounded slightly while other precious metals and agriculture futures were mixed.

Commodities, especially gold, have struggled to take a definitive direction so far this year. Prices have been pressured by conflicting concerns about weakness in the U.S. dollar as well as a fear of a sharp drop in global demand.

Gold and other commodities are often used as a hedge against inflation and a weak greenback. Investors believe low interest rates in the U.S. could pressure the dollar lower, but so far the currency has been relatively strong as central banks overseas lower their own interest rates. Cutting interest rates can boost economic activity but also undermine currencies as investors seek higher returns elsewhere.

On Tuesday, the dollar got a boost from a Commerce Department report that the U.S. trade deficit fell to its lowest level in five years.

However, the report was disconcerting because it also showed a sharp drop in exports, reflecting big declines in sales of American farm products, autos and heavy machinery.

Aluminum giant Alcoa Inc. offered a stark reminder of the pain U.S. manufacturers are feeling late Monday when it reported a $1.19 billion quarterly loss due to sinking demand. Investors remain on edge ahead of more corporate earnings reports in the coming weeks expected to show further deterioration in the economy.

James Steel, an analyst with HSBC in New York, said gold seems to be trading in a "no man's land" right now.

"It seems to garner safe-haven buying on the one hand because of economic uncertainty, but then it kind of stalls on deflation worries," Steel said. "I think that's the theme for a while."

Deflation is a general decline in prices, which, if not kept in check, can set off a vicious cycle of economic erosion.

Gold for February delivery dipped 30 cents to settle at $820.70 an ounce on the New York Mercantile Exchange, after trading between $814 and $831.40 an ounce.

Other precious metals prices were mixed. March silver fell 7 cents to $10.68 an ounce, while March copper futures rose 5.85 cents to $1.5470 a pound.

Crude prices rebounded as Saudi Arabia, the world's largest oil exporter, said it will cut production below quotas it agreed to as a member of OPEC. The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world's crude, has announced production cuts of 4.2 million barrels a day to help stop falling prices.

Light, sweet crude for February delivery rose 19 cents to settle at $37.78 a barrel, after earlier hitting a new low for the year of $36.10.

In other Nymex trading, gasoline futures jumped 4.48 cents to settle at $1.1489 a gallon, while heating oil advanced 3.17 cents to settle at $1.5141 a gallon.

Grain prices mostly rose on the Chicago Board of Trade.

March wheat futures added 1 penny to $5.7075 a bushel, while March soybeans rose 5.5 cents to $9.7150 a bushel.

Corn prices, however, were hampered by Monday's crop report from the U.S. Department of Agriculture that forecast an increase in corn production, but lower demand than expected.

"The story is that we don't need additional acres, that we are going to have a surplus of acres," said Richard Feltes, senior vice president and director of commodity research for MF Global in Chicago.

Corn for March delivery fell 18.25 cents to $3.6250 a bushel.

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