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Gold loses over $20 as dollar gains on Spain

SAN FRANCISCO (MarketWatch) -- Gold futures finished lower Tuesday, giving back nearly all of their gains from a two-session advance, as a drop in the euro after a Spanish ratings downgrade fueled renewed strength in the U.S. dollar, weighing on dollar-denominated gold.

Gold for August delivery (GCQ2) , which is the most-active contract, fell $20.20, or 1.3%, to settle at $1,551 an ounce on the Comex division of the New York Mercantile Exchange.

June gold (GCM2) , which is still actively traded, lost the same amount to finish at $1,548.70.

August gold had climbed more than $14 earlier to touch a high of $1,585 and had tallied a gain of $20.60 over the past two trading sessions. Regular trading on Comex was closed Monday for a holiday.

As problems in the euro zone intensify, traders have flocked to the U.S. dollar as a safe haven. On Friday, the greenback rose to its highest level since 2010.

"The dollar strength and lack of interest in gold as a place for safety has led gold to test the $1,550 area today which has provided some support," said Charles Nedoss, a senior market strategist with Olympus Futures in Chicago, in emailed comments.

But "a close under this level could prompt further downside probing into the $1,520-$1,530 area," he added.

July silver prices (SIN2) lost the most ground among the precious metals, losing 60 cents, or 2.1%, to settle at $27.79 an ounce.

Dollar bounce

"Gold had a swift and negative reaction to the U.S. dollar firming up in the middle of the trading session along with weaker oil prices," said Jeff Wright, managing director at Global Hunter Securities.

"All of this is in reaction to news of a downgrade by Egan-Jones in the credit rating of Spain," he said. "We view Spain as the best line of defense to save the euro zone and have already factored Greece defaulting on their debts and exiting the euro this summer."

Against this backdrop, the euro (EURUSD) fell under $1.25 Tuesday after Egan-Jones Ratings Co. downgraded Spain's credit rating to BB- from B. Read more on currencies.

The downgrade on Spain is "obviously bullish for gold but gold can often be correlated with risk assets such as the euro and equities in the short term," said Mark O'Byrne, executive director at GoldCore.

Investors, instead, favored the greenback, sending the ICE dollar index (DXY) , which measures the dollar against a basket of major rivals, to 82.540, up from 82.228 in North American trade on Monday, and above the 82.416 level seen late on Friday.

Strength in the greenback tends to pressure demand for dollar-denominated commodities such as gold.

"It's my view that gold doesn't react as a safe haven in reaction to financial crisis," said Brien Lundin, editor of Gold Newsletter. "Rather, it reacts positively to the remedies prescribed for such crises, which is almost always money creation of some sort."

"Once it becomes apparent that we'll see such money creation, then gold will begin to respond in a significant fashion," he said. "Until then, however, we'll continue to see high volatility, such as that seen today."

Gold prices traded closer to the session's high shortly after the Conference Board reported Tuesday that a gauge of U.S. consumer confidence declined for a third month. The consumer-confidence index fell to 64.9 in May -- the lowest level since January -- from a revised 68.7 in April. A prior estimate for April pegged the level at 69.2. Economists polled by MarketWatch had expected a reading of 70 for May.

Other metals managed to remain in positive territory, but finished below the session's highs.

Palladium was the biggest gainer in the major metals complex, with the June contract (PAM2) up $13.55, or 2.3%, to $603.55 an ounce. August palladium, which is the most-active contract, rose 2.4%, or $14.20, to $606.05 an ounce. The contract is still down 11% for May.

July platinum (PLN2) added $1.60, or 0.1%, to $1,428.10 an ounce and July copper (HGN2) rose 1 cent, or 0.4%, to $3.46 a pound.