METALS : Gold Tumbles to 2018 Low on Higher Dollar

By Benjamin Parkin and David Hodari

Gold prices fell to the lowest point this year as signs of a stronger economy pushed the U.S. dollar higher.

Front-month gold contracts for May delivery fell 2.1% to $1,288.90 a troy ounce at the Comex division of the New York Mercantile Exchange, the lowest close since December and the largest single-day drop since 2016. Prices for the precious metal have traded between around $1,300 to $1,360 for most of this year, before tumbling out of the bottom end of that range Tuesday.

"Gold has gotten hammered," said Blue Line Futures LLC, a Chicago-based commodities brokerage, in a note. "What had become an extremely constructive bottoming process over the last two weeks is now out the window."

A rally in the dollar, alongside higher Treasury yields, helped drive much of the selling. A stronger greenback makes commodities like gold more expensive for global buyers, while higher yields make the metal less attractive to some investors.

The WSJ Dollar Index, which tracks the U.S. currency against a basket of others, made a new high for the year, rising 0.6% to 86.91. Meanwhile, the yield on the 10-year U.S. Treasury note rose above 3.05%, a multiyear high.

Those moves were driven by data on Tuesday showing that the U.S. economy was gathering steam, overcoming some weakness from earlier in the year.

On the one hand, the Commerce Department said that Americans spent more in stores, online and at restaurants in April. Retail sales rebounded from a winter lull to rise almost 5% from a year earlier. Better consumption was expected to contribute to broader growth, economists said.

Separately, a survey of New York manufacturers by the Federal Reserve Bank of New York said business activity in May picked up more than expected, with indexes for prices paid and prices received both increasing.

That pressured the gold market by suggesting that inflation was quickening, said Tai Wong, head of metals at BMO Capital Markets. Though investors often turn to gold as a hedge against inflation, many were betting that rising prices could quicken the Federal Reserve's pace of interest-rate hikes. Federal Reserve Bank of Dallas President Robert Kaplan said on Tuesday morning that it was the "right thing" for the central bank proceed with raising rates.

The firmer dollar appeared to outweigh any lingering geopolitical jitters concerning Sino-American trade, Russia or the U.S. withdrawal from the Iran nuclear deal. Traders also largely overlooked an outbreak of violence and political tension in the Gaza Strip, said Commerzbank AG, despite a tendency to gravitate toward assets like gold at times of mounting instability.

Among current risk factors, there is nothing facing investors "in the order of magnitude of North Korea firing missiles over Japan like we saw last year," said Sergey Raevskiy, an analyst at SP Angel Corporate Finance LLP.

Chart patterns suggested to some traders that the gold market was headed lower yet, with prices falling below their 200-day moving average on Tuesday.

"There's just not a bullish event for the metal market," said Ira Epstein, a strategist at Linn & Associates LLC in Chicago.

Mr. Epstein suggested that gold prices could fall as low as $1,250 as market participants waited for an outcome to the much-touted U.S.-North Korea summit in June.

Copper prices also suffered under the weight of a higher dollar on Tuesday, with contracts for May falling 1.2% to $3.0425 a pound.

Write to Benjamin Parkin at [email protected] and David Hodari at [email protected]