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Gold sinks as dollar inches higher

The precious metal loses some luster as signs of economic recovery draw investors to more risky investments.

By Ben Rooney, CNNMoney.com staff writer
Last Updated: March 19, 2008: 2:37 PM EDT


NEW YORK (CNNMoney.com) -- Gold prices tumbled Wednesday as the dollar regained strength prompting an exodus of mostly speculative buyers from the market.

COMEX gold for April delivery fell $59 to settle at $945.30 an ounce Wednesday, after closing Tuesday's session at a record high of $1,004.30 an ounce.

"When you are operating in a heavily overbought market, corrections like the one we're seeing today are very easy to have," said Nicoals Kavalis, a senior analyst at precious metals consultancy GFMS.

Kavalis notes that the recent run-up in gold prices has been supported by speculative buying and that, "it's not hard for that 'hot money' to move out of market," when conditions change.

Gold began to slide shortly after the Federal Reserve cut interest rates Tuesday by three-quarters of a percentage point, instead of the full percentage point that some market participants had expected.

The dollar, which has hit a series of record lows, began to advance against the euro in response to the Fed's announcement. Normally, interest rate cuts depress the value of the dollar. However, since the cut was less aggressive than expected, the greenback benefited.

Gold is priced in dollars, making it an attractive investment for overseas buyers. But if the dollar begins to strengthen, investors from overseas markets are more likely to sell their gold.

Moreover, gold's reputation as a safe-haven investment, one that holds value in times of economic volatility, contributed to the metal's record-breaking run.

Buying gold and other commodities like oil and wheat is seen as way to hedge against inflation, which has also helped support the gold market recently.

Still, Kavalis thinks Wednesday's selloff is largely a reaction by speculative buyers to changes in the economic climate, which can "have a dramatic impact on the price of gold."

First Published: March 19, 2008: 11:19 AM