Gold Falls in New York as Dollar Rebounds; Silver Declines

Dec. 18 (Bloomberg) -- Gold fell in New York for the first time this week as the dollar rebounded, eroding the appeal of the metal as an alternative investment. Silver also declined.

The dollar rose as much as 1.5 percent against a weighted basket of six major currencies, after dropping 5.7 percent in the previous three days as gold climbed 5.9 percent. Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 775.3 metric tons yesterday. The metal is headed for an eighth-straight yearly gain.

“The dollar is the major issue pushing gold down today,” said Tom Hartmann, a commodity analyst at Altavest Worldwide Trading Inc. in Mission Viejo, California. “The dollar’s uptrend is still intact.”

Gold futures for February delivery fell $7.90, or 0.9 percent, to $860.60 an ounce on the New York Mercantile Exchange’s Comex division.

Silver futures for March delivery fell 30 cents, or 2.6 percent, to $11.12 an ounce on the Comex. The most-active Silver contract has dropped 25 percent this year, while gold is up 2.7 percent.

Gold yesterday reached $883.60, the highest since Oct. 10. The seven-day relative strength index for gold futures has been above 70 all week, an indication to technical traders that the price is headed lower in the near term.

“Gold has had a nice run here, so I wouldn’t be surprised to see some selling,” said Marty McNeill, a trader at R.F. Lafferty Inc. in New York. “We’re running into some resistance between $870 and $880.”

Covering Losses

As asset prices fall, investors may also sell the metal to cover losses in other markets. The Standard & Poor’s 500 Index of equities and the Reuters/Jefferies CRB Index of 19 commodities both are down 38 percent this year. Gold is the fourth-best performer on the CRB Index and may be used to raise cash, analysts said.

“We have to get through a bout of deflation in commodity prices,” said Hartmann of Altavest. “Gold doesn’t do well in a deflationary environment.”

Still, gold’s losses may be limited as the Federal Reserve’s interest-rate cut this week weakens the dollar and erodes the currency’s allure as a haven for investors. As the credit crisis unfolded, the dollar surged between July and November, pushing yields on three-month Treasury notes below zero for the first time this month.

Policy makers reduced the benchmark lending rate from 1 percent to a range between zero and 0.25 percent on Dec. 16, the lowest ever. The Fed began cutting borrowing costs from 5.25 percent in September 2007 as the economy headed into a recession.

Smelling Fear

“The Fed’s actions show just how dire the credit crisis is and how desperate they are,” said Ralph Preston, a commodity analyst at Heritage West Futures Inc. in San Diego. “The metals smell the fear. Market psychology is beginning to view gold as a safe haven.”

Gold may average $820 next year, with gains coming in the first half, analysts at Barclays Capital said yesterday in a quarterly report.

“In the near term, prices are likely to remain torn between two camps,” Barclays said. “A pick-up in physical demand and additional safe-haven buying will support prices, but the need to liquidate positions to meet margin calls elsewhere will cap gold’s upside potential.”