Gold Falls Most in Two Weeks as Dollar Rebounds, Eroding Demand

Jan. 5 (Bloomberg) -- Gold fell the most in two weeks as the dollar rebounded, reducing the appeal of the precious metal as an alternative investment. Silver also sank.

The dollar climbed as much as 1.6 percent against a weighted basket of six major currencies, after posting the first monthly decline since June last month. Gold and other precious metals generally move in the opposite direction of the U.S. currency. Gold rose the least since 2004 last year as the dollar advanced for the first time since 2005.

“This is about the dollar-gold relationship,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. “With the dollar up so much, gold should be down.”

Gold futures for February delivery fell $21.70, or 2.5 percent, to $857.80 an ounce on the New York Mercantile Exchange’s Comex division, the biggest one-day drop for a most- active contract since Dec. 19. The metal rose 5.5 percent last year.

Silver futures for March delivery dropped 22 cents, or 1.9 percent, to $11.27 an ounce. The most-active contract fell 24 percent last year after seven straight annual gains.

The dollar touched a three-week high against the euro on speculation that President-elect Barack Obama’s plan to cut taxes will help the U.S. recover from a recession faster than other countries. The Federal Reserve has slashed its benchmark lending rate close to zero to help stimulate the economy while the European Central Bank’s main interest rate is still at 2.5 percent.

“Treasuries and gold are seeing less of a flight to quality,” Lesh said.

The U.S. Dollar Index, the weighted basket that includes the euro and yen, slumped 6 percent in December after rising for five straight months.

Gold Outlook

Gold may trade at $800 in one to three months, UBS AG analyst John Reade said today in a report.

“Unless the dollar remains weak, gold could succumb to some profit-taking,” Reade said in the report. “Any short- term traders who caught the recent move higher should take profits here.”

Before today, gold had rallied for four straight weeks. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 780.2 metric tons on Dec. 29. The fund’s assets grew 24 percent last year.

Platinum, which fell 38 percent last year as auto sales declined to the lowest in 16 years, may be cheap should government bailouts and tax cuts revive consumer demand for autos, analysts said.

About 60 percent of platinum is used in pollution-control devices in cars.

Platinum futures for April delivery rose $10.90, or 1.2 percent, to $957.60 an ounce on the Nymex. Palladium futures for March delivery fell $7.35, or 3.8 percent, to $184.95 an ounce. Palladium dropped 50 percent in 2008.