Dollar soars, gold drops on Wall Street losses

Gold turned lower on Wednesday as investors raised cash to cover heavy losses on Wall Street, and as the dollar soared against the euro on sharply lower risk appetite.

Gold erased initial gains as losses in the equity markets deepened, prompting investors to sell assets across the board.

The S&P 500 index dropped 2.5 per cent a day after the Federal Reserve downgraded the outlook for the US economy.

"There is a time when investors just sell off assets and ask questions later rather than shifting over funds into safe havens," said Tom Pawlicki, precious metals and energy analyst at MF GLOBAL.

"When the stock market liquidates in a very quick fashion, gold doesn't even benefit even though the safe-haven argument is still valid," he said.

Also weighing on gold, the dollar rallied more than 2 per cent against the euro as investors bought US Treasury debt as a safe haven.

Spot gold was at $1,195.50 an ounce at 11:55 a.m. EDT (1555 GMT), against $1,201.85 late in New York on Tuesday. US gold futures for December delivery were down 20 cents at $1,197.80.

Spot bullion rose as high as $1,207.05 on Tuesday after the Fed kept interest rates near zero and said it would use cash from maturing mortgage bonds to buy government debt, keeping an easier monetary policy in place longer than expected.

The Fed's announcement boosted gold initially as the dollar weakened.

"The initial reaction was a bit of a knee-jerk for both the dollar and gold, so gold went up and the dollar went off," said Credit Suisse analyst Tom Kendall. "And then this morning, sentiment seemed to reverse."

MF Global's Pawlicki said gold could benefit in the long term as an alternative asset if equity markets stayed weaker.

Also, low interest rates generally support gold, cutting the opportunity cost of holding non-interest bearing assets like bullion.

Among other commodities, oil prices fell more than 2 per cent, weighed down by strength in the dollar, while base metals such as copper also slipped as the market mulled economic and demand growth prospects.

Overall, raw materials prices are being pressured by concerns over the Fed's lackluster view on the U.S. economy.

This could support gold, however.

"Slower U.S. growth should lead to dollar strength against most risky currencies," Barclays Capital said in a note.

"Such an environment is likely to prove to be favorable for gold prices particularly given that the recent upside in prices was driven by the resurgence in safe-haven buying," Barclays added.

Among other precious metals, silver was at $17.82 an ounce against $18.25, while platinum was at $1,524.05 an ounce against $1,539.50 and palladium was at $463.98 against $473.75.

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