Gold Sells Off On Bernanke's Dollar Comments

June 3, 2008 7:39 p.m. EST

New York, NY (AHN) - Comments from Federal Reserve Chairman Ben Bernanke on Tuesday helped spark a sell off in gold and other precious metals.

August gold fell $11.50 a troy ounce to close at $885.50 on the New York Mercantile exchange.

Bernanke spoke to a monetary conference in Spain via satellite.

Bernanke linked the declining dollar to rising inflationary pressures.

The decline had a "chilling and immediate effect" on gold, as well as crude oil, said Jon Nadler, analyst with Kitco Bullion Dealers.

Now that the Fed Chairman has acknowledged inflation, "a line in the sand" has been drawn on how much the dollar will fall, Nadler added.

One of the biggest moves the Federal Reserve can make to battle inflation is to raise rates, which tightens the money supply as the dollar becomes harder to borrow. This action leads to a stronger dollar, while cutting rates has the opposite effect.

Bernanke essentially drew "a line" when citing inflationary pressures because the Fed does not make a practice of cutting rates in such an environment.