Gold sinks to 2-week low

Obama's proposed $300 billion in tax cuts drives the dollar higher and weighs on the gold market.

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By Ben Rooney, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- The price of gold fell to a two-week low Monday as the U.S. dollar rallied on new details about President-elect Barack Obama's fiscal stimulus plan.

A stronger dollar undercuts the appeal of gold for investors looking to hedge against inflation. And a more robust greenback makes commodities priced in dollars more expensive for overseas buyers.

Gold for February delivery fell $21.70, or 2.5%, to settle at $857.80 an ounce. That's the biggest decline since Dec. 19, when gold shed $23.20 to $848 an ounce. The contract earlier fell to a session low of $846 an ounce.

"It's definitely a dollar-driven event today," said Jon Nadler, senior analyst at Kitco Bullion Dealers in Montreal. "The size and scope of the Obama plan is being seen as dollar beneficial."

The president-elect, who is meeting with top legislators Monday, is proposing roughly $300 billion in tax cuts for businesses and individuals intended to revive the nation's economy, which has been mired in recession for more than a year.

Obama's plan also seeks to create millions of new jobs through increased government spending on infrastructure and alternative energy projects.

The plan helped drive the dollar up 2.4% against the euro to $1.3572 in afternoon New York trading.

Demand for gold as an inflation hedge was also undermined Monday by comments from Federal Reserve and European Central Bank officials indicating that prices could continue to fall.

"It is increasingly likely that inflation will fall to undesirably low levels," said Janet Yellen, president of the San Francisco Federal Reserve Bank, at meeting of economists in San Francisco. "The financial and economic firestorm we face today poses a serious risk of an extended period of stagnation -- a very grim outcome."

2008: Despite last year's economic turmoil, gold managed a 5.58% net gain in 2008, according to Nadler. That compares to historic declines for the major stock indexes, including a 38.5% retreat in the broad S&P 500 index.

But gold certainly saw its share of volatility during the year. It soared to an all-time high above $1,000 an ounce in March as investors looked for a safe alternative to shaky stock markets.

Gold prices then tumbled to $720 an ounce in October amid a broad selloff in the commodities markets and a prolonged dollar rally.

Looking ahead, Nadler said he expects the price of gold to average about $810 in 2009. That's down from a cumulative average of $871.96 in 2008. To top of page

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