Gold Declines as Dollar Rebounds Against Euro; Silver Gains

Jan. 2 (Bloomberg) -- Gold fell as the dollar climbed against the euro, eroding the appeal of the precious metal as an alternative investment. Silver and platinum futures rose.

The euro slid after a report on European manufacturing indicated the recession is deepening in the 16-nation region, signaling that the European Central Bank may cut borrowing costs to stimulate the economy. Gold and other commodities often move in the opposite direction of the dollar. In 2008, gold gained 5.5 percent, the smallest increase since 2004, as the dollar climbed for the first time in three years against the euro.

“The dollar is a little stronger, which was an additional weight that gold is fighting against,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago.

Gold futures for February delivery dropped $4.80, or 0.5 percent, to $879.50 an ounce on the Comex division of New York Mercantile Exchange. The metal still climbed almost 1 percent this week.

The ECB’s benchmark interest rate is 2.5 percent, while the U.S. federal-funds rate is zero to 0.25 percent. Simultaneous recessions in the U.S., Japan and Europe have forced central banks worldwide to cut borrowing costs to stimulate growth.

Gold followed fluctuations in energy costs. The metal pared losses as crude oil jumped as much as 4.8 percent following an 8 percent drop. Tensions mounted in the Middle East between Israel and Iran-backed Hamas.

‘Tracking Oil’

Israeli warplanes and naval vessels hit more than 20 targets in Gaza overnight, including a mosque and a refugee camp that the country claimed was being used to store weapons.

“Gold is tracking oil,” McGhee said. “Tensions in the Middle East are starting to come back into the trading psyche.”

Still, a global recession may damp demand for the precious metal. Gold imports by India, the world’s biggest buyer, fell for a second straight month in December, according to the Bombay Bullion Association Ltd.

Purchases fell to about 3 metric tons from 16 tons a year earlier, the group of traders reported.

“Unless gold can bank on investment demand to more than offset the slump in Indian purchase tonnages, we must remain on alert and exercise caution,” said Jon Nadler, a senior analyst at Kitco Inc. in Montreal. “Demand destruction of this type is not beneficial.”

Silver, platinum and palladium, which all had annual losses in 2008, gained as a rally in equities heightened speculation that demand for industrial metals will rebound.

Stocks Rally

“You’re seeing some catch-up from other precious metals,” McGhee said. “A stock-market rally is helping other precious metals, which are more industrial than gold.”

Silver futures for March delivery rose 19.5 cents, or 1.7 percent, to $11.49 an ounce. This week, the price gained 9.1 percent, the most since mid-September. The metal dropped 24 percent in 2008.

Platinum futures for April delivery climbed $5.20, or 0.6 percent, to $946.70 an ounce on the Nymex. The price climbed 5.8 percent this week.

Palladium futures for March delivery rose $3.60, or 1.9 percent, to $192.30 an ounce. This week, the price jumped 9.3 percent, the most since early November.

Palladium plunged 50 percent in 2008, while platinum declined 38 percent.

The Standard & Poor’s 500 Index climbed as much as 2.6 percent today.