PRECIOUS METALS: Comex Gold Ends Lower On Dollar Strength

July 28 - Gold futures slumped to a two-day low as tensions over the U.S. budget stalemate and renewed concerns about European debt roiled the currency markets and flushed out anxious investors.

President Barack Obama and Republican party leaders must reach a deal to raise the U.S.'s borrowing limit by Tuesday to avoid a debt default and keep the country's AAA credit rating intact.

"The issue that's got to be solved is some form of deficit reduction, whether through spending cuts, taxes or higher inflation," said David Jollie, strategic analyst with Mitsui Global Precious Metals.

Gold will be the first line of defense for many investors in the event of a U.S. default as it is less vulnerable to market shocks than equities or bonds. Initially gold will be sold to generate cash and cover losses on other holdings, though prices should stabilize and move higher in the medium term, analysts said.

But with just six days to go and no solution on the horizon, some investors are already selling gold as they move to the sidelines.

Gold for August delivery, the most actively traded contract, fell $1.70, or 0.1%, to settle at $1,615.10 a troy ounce on the Comex division of the New York Mercantile Exchange. The contract set an intraday record of $1,628.80 a troy ounce earlier in the day.

July-delivery gold didn't change hands during its final day of trade.

A sudden jump in the dollar torpedoed gold's chance of setting its third consecutive record settlement. Gold is considered a currency alternative and prices are sensitive to sharp shifts in the currency markets.

"Things can turn on a dime, because everyone is watching headlines and there's a lot of nervousness out there," said George Gero, vice president at RBC Capital Markets Global Futures.

Stern comments by German Finance Minister Wolfgang Schaeuble that the European debt crisis wasn't resolved last week, despite Greece securing a second bailout, refocused traders' attention on Europe's debt problems and helped the dollar rally to a two-day high against the euro.

Gold futures, which are denominated in dollars, fell as gold demand among investors using foreign currencies tends to wane when the greenback strengthens.

Investors are "constantly going back between the U.S. and Europe. Yesterday, the U.S. was the worse option. Today, Europe is the worse option," said Zachary Oxman, managing director at TrendMax Futures.

Comex gold options expiration, which occurred overnight, also added to selling pressure. August option contracts for purchases below Tuesday's settlement price became August-delivery futures contracts overnight, luring some investors to cash in the gains by selling the positions.

"There was some profit taking and evening out today," as traders cashed in gains on options positions amid gold's record-high prices, Gero said.