With dollar strong and Fed on track to raise key interest rate, price of gold hits 5-year low

Markets Associated Press

The price of gold fell to five-year lows Monday as the dollar remained strong and the Federal Reserve continued to send signals that it plans to raise interest rates soon.

Continue Reading Below

The precious metal is now trading around its lowest prices since March 2010, at $1,104.80 an ounce near midday. That's down $27.10, or 2.4 percent, from Friday's close and more than 40 percent below its peak price.

Gold was seen as a safe investment during the financial crisis, sending its price surging higher. Its value continued to rise during the sluggish recovery as employment and other key economic indicators remained weak. When the Federal Reserve decided to undertake a huge economic stimulus program, some investors continued to buy gold because they felt the Fed's action would lead to inflation.

Although the pace of the recovery has been uneven and wage growth is weak, the economy has gradually gained strength over the years. And instead of skyrocketing, inflation has remained low. In fact it's lower than the Fed would like, and that's one of the reasons it intends to raise interest rates soon.

Federal Reserve Chair Janet Yellen has maintained that the Fed will probably raise its benchmark interest rate this year if the economy continues to improve. She reiterated that view during a report to Congress last week. The Fed's benchmark interest rate has been near zero since December 2008.

The expected interest-rate boost and improved economy have led to lower prices for many commodities, but precious metals are down the most. The price of gold peaked at $1,923 in August 2011, about 43 percent above its current price.

Continue Reading Below

Credit Suisse analyst Anita Soni expects a modest recovery, however. In a note to clients last month, Soni said she expects gold prices to recover based on strong demand from Asia, reduced mining activity and increased purchases of gold by central banks. She added that the price of gold often rises in the third and fourth quarters and wrote that the same should happen in 2015. She thinks the price of gold will rise to about $1,250 an ounce.