Gold generally moves in the opposite direction of the dollar, which extended the biggest drop in two weeks against the euro after U.S. economic reports suggested the Federal Reserve may not raise rates again this year. Gold is up 23 percent this year, while the dollar has dropped 8 percent against the euro.
``The pressure on the dollar is helping gold,'' said Tom Hartmann, a commodities broker at Altavest Worldwide Trading Inc. in Mission Viejo, California. ``The dollar has fallen a bit with the Fed not having to raise rates'' while other countries are increasing rates, he said.
Gold futures for December delivery rose $6.10, or 1 percent, to $639 an ounce on the Comex division of the New York Mercantile Exchange. Prices had dropped 4.3 percent in the previous four sessions.
A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.
The dollar fell against the euro and yen after reports showed U.S. consumer prices excluding food and energy eased last month while home construction dropped to the lowest level in almost two years.
Before today, gold had fallen 14 percent from a 26-year high of $732 on May 12, when the U.S. Federal Reserve signaled it would raise interest rates to curb inflation. The Fed decided last week against an 18th rate increase since June 2004 as policy makers count on slower growth to curb accelerating prices.
`Terminally Ill' Dollar
Gold may be poised to test the May highs later this year because ``the dollar is terminally ill,'' Peter Grandich, publisher of the Grandich Letter, a financial newsletter in Perrineville, New Jersey, told clients in a report today.
``Key currencies like the euro and the yen are going to see their central banks raising rates more than the U.S., which is only going to add to dollar weakness,'' Grandich said.
Gold may fall should banks in Europe sell more of the precious metal. Under an accord known as the Washington Agreement, European central banks have agreed to limit gold sales to 500 tons a year, and the banks have not reached that limit.
``There is some talk of more central bank selling in Europe because they haven't met their quota for the year,'' Hartmann of Altavest said. ``We could see some heavier selling pressure in the next month.''
European central bank sales may fall short of the 500-ton limit for the year ending Sept. 26, the producer-funded World Gold Council said today. Gold supply fell 5 percent to 832 tons as central bank sales dropped 63 percent, the council said.
Central banks in Europe have sold about 338 tons of gold this year, said Jill Leyland, an economist at the council. The agreement allows for a total of 2500 tons of gold to be sold between 2004 and 2009.
