GOLD PRICES fell sharply against a surging Dollar in London on Tuesday, retreating 1.5% from yesterday's 3-month highs as the US currency jumped after weak European inflation data were followed by strong US housing numbers.

 

The Dollar hit sudden 1-week highs vs. both the Euro and Sterling as Eurozone inflation was confirmed at just 0.6% per year in April, and UK inflation gave its first ever negative reading on the 20-year old Consumer Price Index.

 

The gold price for Dollar investors retreated below $1215 per ounce, the highest level in almost 6 weeks until last Wednesday's $20 jump following weak US retail sales data.

 

Gold priced in Euros meantime rose to new 1-month highs above €1090 per ounce, however, after a speech given Monday in London by European Central Bank member Benoit Coeure was published, stating his  concern at "the rapidity" of the recent sell-off in Eurozone government bonds, led by German Bund prices.

 

Eurozone bond yields edged lower as prices held firm on Tuesday, while broad commodity markets dropped 1.4% against the Dollar.

 

The ECB, said Coeure, also plans to accelerate its quantitative easing in May and June, creating more money to buy government bonds before the fixed-income markets sees their typical "seasonal patterns of notably lower liquidity in the traditional holiday period from mid-July to August."

 

"Should we get another burst of buying in the Dollar," said a note from US brokers INTL FCStone overnight, "we could see the pressure mount on gold.

 

"But we suspect that rallies in the greenback will likely be shortlived given the likelihood that the US economy will continue to show signs of ongoing weakness."

 

US housing data released Tuesday showed both new building permits and building starts rising in April to the highest level since late-2007.

 

Gold prices in Shanghai – where Chinese authorities are planning to audit all bullion traders as part of a clampdown on fake exports hiding capital outflows – earlier saw "the very small initial premium" above comparable London quotes "moving into discount," says Swiss refining and finance group MKS's Asian desk, removing the key incentive for bullion imports to China.

 

"Gold sold off in line with EUR/USD breaking below $1.13," says the note, with "silver falling more dramatically on very thin liquidity."

 

Silver tracked Dollar gold prices lower in London on Tuesday, but held firmer near last week's finish at $17.50 per ounce.

 

Over in New York on Monday, Dollar silver's new 4-month highs saw the giant iShares Silver Trust (NYSEArca:SLV) shrink by another 37 tonnes as investors cut their exposure, taking the ETF's holdings below 9,890 tonnes, down 3.5% from late-April's three-month high.

 

The giant SPDR Gold Trust (NYSEArca:GLD) also shrank again, dropping more than 5 tonnes as investors sold out to stand at 718 tonnes – over 7% below end-January's sudden rebound from 7-year lows at New Year.