Gold Rises on Speculation Dollar to Drop on Recession

Jan. 9 (Bloomberg) -- Gold rose for a second day on speculation that the dollar will slide as the recession deepens, boosting the appeal of the precious metal as an alternative investment. Silver also gained.

U.S. job losses last year were the most since 1945, Labor Department data showed today. The federal budget deficit is expected to hit $1.18 trillion this year as the government spends billions on industry bailouts and tax cuts. Gold’s gains last year were the smallest since 2004 as the dollar advanced for the first time since 2005 against a basket of six major currencies.

“The dollar is looking weak again, and there are growing worries about the federal deficit,” said James Turk, the founder of GoldMoney.com, which held $476 million of gold and silver for investors at the end of December. “The Federal Reserve is going to fund much of the government’s borrowing with newly printed dollars.”

Gold futures for February delivery rose 50 cents to $855 an ounce on the Comex division of the New York Mercantile Exchange. Earlier, the price dropped as much as 1.1 percent, and the metal still ended the week down 2.8 percent, the first decline in a month.

Silver futures for March delivery gained 22.3 cents, or 2 percent, to $11.32 an ounce on Comex. The price is down 1.5 percent this week.

Interest Rates, Recession

The Fed has slashed its benchmark interest rate to zero to 0.25 percent. The government has pledged more than $8.5 trillion as of Nov. 25 to bail out financial companies and help the country recover from a recession. President-elect Barack Obama favors an additional stimulus package of at least $775 billion.

“Further out, the massive amounts of dollars created will have an impact,” said Adrian Day, the president of Adrian Day’s Asset Management in Annapolis, Maryland. “Once they get into the economy, that will lead to some inflationary pressure as well as a deteriorating dollar.”

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was little changed this week after reaching 787.9 metric tons on Jan. 6. The fund’s assets grew by 24 percent last year.

Still, some analysts say gold’s gains may be limited should falling asset prices reduce the appeal of the precious metal as an inflation hedge. Crude oil dropped as much as 5.6 percent today and is down 13 percent this week.

“The balance is tipped toward the downside, based on our outlook for disinflation,” said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago. “We see a decreased need for inflation hedging, which should keep pressure on gold prices in the longer term.”