Gold Falls After Reaching Seven-Month High; Silver Declines

Feb. 19 (Bloomberg) -- Gold fell for the first time this week as demand eased after the price reached the highest since July. Silver also declined.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, rose to a record 1,024.1 metric tons yesterday. The seven-day relative strength index for gold topped 70 for three straight days, signaling that prices may fall in the short term. Yesterday, the metal reached $988.70 an ounce, the highest since July 15.

“You’re bound to see some speculative selling against the $1,000 level,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “There are no fundamentals supporting this market. It’s all investor driven.”

Gold futures for April delivery fell $1.70, or 0.2 percent, to $976.50 an ounce on the Comex division of the New York Mercantile Exchange. The price still is up 10 percent this year.

Silver futures for March delivery slid 35.5 cents, or 2.5 percent, to $13.935 an ounce. The metal still has gained 23 percent this year.

The SPDR Gold Trust is now the seventh-largest holder of gold, after the International Monetary Fund and the governments of the U.S., Germany, France, Italy and Switzerland.

Switzerland has 1,040 tons of gold, according to the producer-funded World Gold Council.

Funds in the SPDR Gold Trust have already increased by 243.9 tons this year, compared to 152.4 tons for all of 2008. Jewelry demand, which accounted for 58 percent of purchases in 2008, fell 11 percent to 2,137.5 tons, according to a gold council report released yesterday. Investment in all bullion ETFs last year rose 27 percent to 321.4 tons.

Investment Demand

“Now that investment demand has displaced all jewelry demand and is accommodating heavy returning scrap, the only way that a further increase in investment can occur is if gold prices move higher,” UBS AG analyst John Reade said in a report today.

Still, gold may continue to climb as investors seek an alternative to stocks and bonds, Kaplan said. The metal reached a record $1,033.90 on March 17.

More than $27 trillion has been erased from the value of global equities in the past year as credit losses and writedowns reached $1.1 trillion. This year, the Standard & Poor’s 500 Index is down 14 percent, and the 10-year U.S. Treasury note has returned 1.2 percent.

“Gold is the new flavor of the month,” Kaplan said. “The reason gold keeps rising is because people are fed up to the gills with the traditional investment system because it has failed them.”

The metal has gained this year on speculation that government spending will trigger inflation. The U.S. has pledged more than $9.7 trillion to ease the recession and credit crisis.

U.S. producer prices rose 0.8 percent in January, following a 1.9 percent in December, figures from the Labor Department showed today. The increase was the first in six months.