Gold, Silver Hit by Fed Fears, Dollar Gains

Gold and silver futures slumped Wednesday, remaining under pressure as upbeat U.S. economic data supported the view that the Federal Reserve will slow the pace of monetary stimulus this year. Gains for the dollar also pressured the metal.

Extending earlier losses, gold for August delivery GCQ3 -3.45%  fell $42.10, or 3.3%, to $1,233 an ounce, while July silver SIN3 -5.15%  dropped $1.09, or 5.5%, to $18.45 an ounce.

“We’re seeing severe technical weakness in gold this morning, with prices plummeting to levels not seen since 2010,” said David White, financial trader at SpreadEx in a note. “A combination of dollar strength, economic progress and a re-rating to the market’s expectations of central bank asset purchases are crushing prices.”

Dollar-denominated commodities felt the pinch from a rise in the U.S. dollar DXY +0.05%  against key rivals, with the greenback looking for a sixth consecutive day of gains.

The buck rose Tuesday after a report showed U.S. sales of new homes rose 2.1% in May, the fastest rate since mid-2008, and the Case-Shiller April home-price index jumped 2.5% in April, the largest monthly growth on record.

But those reports spurred a downturn in gold prices on Tuesday. Prices fell $2 to $1,275.10 an ounce, the lowest settlement for a front-month contract since Sept. 21, 2010, according to data from FactSet.

Federal Reserve Chairman Ben Bernanke last week indicated the central bank may slow the pace of bond buying as early as this year if the economy continues to improve within its forecasts. The Fed currently buys $85 billion a month in U.S. Treasurys.

Later Wednesday, the U.S. Commerce Department is slated to release the third estimate of gross domestic product for the first quarter.

Monetary stimulus from the Fed and other central banks, in efforts to support economic growth, have been credited for helping fuel a rally in gold prices in recent years.

Precious metals are poised to remain under pressure in the second half of the year, Wells Fargo Advisors told clients Tuesday. The potential change in Fed policy, “in the face of falling inflation expectations, has reversed the fundamental support for precious metals,” wrote Wells Fargo Advisors chief international strategist Paul Christopher.

Gold is considered an inflationary hedge.

Wells Fargo Advisors cut its year-end target range for gold, saying it now expects to see prices settle at $1,225 to $1,325 an ounce. It has previously expected prices to end the year at $1,475 to $1,525 an ounce. Wells Fargo also reduced its 2013 inflation target to 2% from 2.5%.

Goldman Sachs, Credit Suisse and HSBC also downgraded their gold forecasts this week.

Precious metals will continue to be a useful hedge against potential inflation recovery, or geopolitical turmoil, wrote Christopher, who recommended “this exposure be taken through a diversified commodity allocation, not through stand-alone exposure to precious metals.”

Gold prices so far this week have lost more than 3%, and are down 10% as the end of June trading approaches on Friday.

Prices for other metals fell Wednesday, with July copper HGN3 -0.91%  down 5 cents, or 1.6%, at $3.02 a pound. July platinum PLN3 -2.15%   dropped $30, or 2.2%, to $1,320.50 an ounce, and September palladium PAU3 -3.16%  shed $19.40, or 2.9%, to $649.40 an ounce.

Source: Market Watch