Gold Falls in New York on Deflation Concerns, Stronger Dollar

Dec. 3 (Bloomberg) -- Gold fell in New York as the dollar strengthened and deflation concerns mounted, reducing the appeal of the metal as an alternative investment. Silver also declined.

The dollar rose against the euro as economists forecast a rate cut tomorrow by the European Central Bank. Gold often moves inversely to the U.S. currency. Some investors buy the metal to preserve value when consumer prices rise. Excluding food and fuel costs, the U.S. consumer price index fell in October for the first time since 1982, government figures show.

“After having a run to the $830 level a few weeks ago, gold has been under pressure on account of the dollar,” Edward Meir, an analyst at MF Global Ltd. in Darien, Connecticut, said today in an e-mailed note. “More importantly, with deflation -- as opposed to inflation -- now being the key macro development to watch, gold’s attraction has been waning.”

Gold futures for February delivery fell $12.80, or 1.6 percent, to $770.50 an ounce on the Comex division of the New York Mercantile Exchange. The metal tumbled 5.2 percent on Dec. 1, the most since March, and is down 8.1 percent this year.

“Gold is at a basic standstill waiting for some real news,” Miguel Perez-Santalla, a sales vice president at Heraeus Precious Metals Management in New York, said today in an e- mailed note. “It is all about investors at this stage, as the jewelry industry will not be in the picture again until after the New Year.”

Silver futures for March delivery slipped 2.5 cents, or 0.3 percent, to $9.59 an ounce on Comex. The metal has dropped 36 percent this year.

Gold is headed for an annual decline for the first time in eight years, while the U.S. Dollar Index, a gauge that includes six major currencies, is poised for its first advance in three years. The index, which gained 0.4 percent today, rose 9.6 percent in the third quarter, while gold fell 5.1 percent.

Consumer Prices Fall

The CPI declined 1 percent in October, the most since records began in 1947, according to the U.S. Labor Department. Federal Reserve policy makers predicted the U.S. economy will contract until the middle of next year, with some officials concerned about the risks of deflation, according to minutes of their Oct. 28-29 meeting.

Confronting what may be the worst recession since World War II, the Fed will cut its target bank-lending rate at a Dec. 16 meeting by a quarter of a percentage point, to 0.75 percent, according to economists surveyed by Bloomberg News. The Fed has reduced its benchmark interest rate by 4.25 percentage points since September 2007, to 1 percent.

Rate Cuts Expected

Other central banks are lowering borrowing costs. In New Zealand, the Reserve Bank cut its benchmark rate by a record 1.5 percentage points to 5 percent. In the U.K., the Bank of England is expected to slash its key lending rate by a third to 2 percent tomorrow, while the rate for the euro region may be trimmed a half-percentage point to 2.75 percent.

“It looks like the ECB will be cutting rates more than originally expected, and if they do, the dollar will strengthen and we may see weaker metals prices,” Perez-Santalla said in a report earlier today.

A global recession may curb demand for all raw materials, and prompt some investors to sell precious metals to raise cash and cover losses in other markets, some analysts said.

The Reuters-Jefferies CRB Index of 19 raw materials fell as much as 1.2 percent today to a six-year low. The index has dropped 37 percent this year.