Gold Prices Decline in New York as Dollar Gains; Silver Drops

Jan. 13 (Bloomberg) -- Gold futures dropped in New York as the dollar rallied, limiting the appeal of the precious metal as an alternative investment. Silver also fell.

The dollar climbed as much as 1.7 percent against the euro on speculation that the European Central Bank will reduce borrowing costs to stimulate the region’s economy. Gold’s gains last year were the smallest since 2004 as the dollar advanced against the euro for the first time since 2005.

“Ultimately, the dollar is the driver,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. “The dollar push is holding gold back. It looks like the ECB will be easing, and there won’t be anymore interest-rate reductions out of the U.S.”

Gold futures for February delivery declined 30 cents to $820.70 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price touched $814, the lowest for a most-active contract since Dec. 12. The metal fell 4 percent yesterday.

Silver futures for March delivery dropped 7 cents, or 0.7 percent, to $10.68 an ounce on the Comex. The metal declined 24 percent in 2008.

The Federal Reserve’s benchmark interest rate in the U.S. is zero to 0.25 percent. The ECB’s main rate is at 2.5 percent.

Precious metals may fall further as the slumping economy drives all asset prices lower, analysts said.

‘Disinflationary’

“Weak levels of physical demand, easing in credit-market tightness, a disinflationary environment and technical factors” may push gold lower, said Tom Pawlicki, a metals analyst at MF Global Ltd. in Chicago.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was little changed at 787.6 metric tons yesterday after reaching a record 787.9 tons on Jan. 6. Assets grew 24 percent last year.

Earlier, gold rose as much as 1.3 percent on demand for a store of value amid signs of a deepening recession.

“Gold is not as weak as some of the other commodities,” Lesh of FuturePath said. “Volatility in other markets and the geopolitical tensions are always supportive for gold. A good dip in prices is a buying opportunity.”

Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, advises buying gold should the metal rally above $890. UBS AG analyst John Reade said investors should look to purchase the metal below $800.