Gold Falls for Fifth Day as Dollar Strengthens; Silver Advances

Feb. 27 (Bloomberg) -- Gold fell, capping the first weekly loss in three, as the dollar strengthened to the highest level since April 2006, eroding the appeal of the precious metal as an alternative investment. Silver advanced.

The U.S. Dollar Index rose against the currencies of six major trading partners on demand for a haven after the U.S. bailed out Citigroup Inc. for a third time, stoking concerns that the credit crisis and the recession may deepen. U.S. stocks fell for a third straight day and the Reuters/Jefferies CRB Index of 19 commodities dropped as much as 1.9 percent.

“The demand for dollars has outweighed the demand for gold in terms of safe-haven flows,” said Ralph Preston, a commodity analyst at Heritage West Futures Inc. in San Diego. “Gold is turning into a currency and competing with the dollar. It’s the battle of the safe havens.”

Gold futures for April delivery fell 10 cents to $942.50 an ounce on the Comex division of the New York Mercantile Exchange. That left the metal down 6 percent for the week, the first decline since Feb. 6 and the biggest since Dec. 5.

Gold and the dollar generally move in the opposite direction. The correlation hasn’t held this year as demand for both the U.S. currency and gold have risen because of the financial crisis. The dollar index has gained 1.7 percent this week.

“The gold price will remain supported into the second quarter as fears towards world growth persist,” analysts at Deutsche Bank AG said today in a report. “However, we remain concerned that the gold price rally is based on shaky foundations as it has not been accompanied by a weakening of the U.S. dollar.”

Gold-Dollar Moves

Gold and the dollar last moved in tandem in 2008, when the Dollar Index gained 6 percent and gold rose 5.5 percent. Before last year, gold gained 18 percent in 2005 and the Dollar Index rose 13 percent.

Still, gold may be a better bet than the dollar as U.S. government spending and corporate bailouts eventually spark inflation and erode purchasing power, some analysts say.

The U.S. government has pledged more than $9.7 trillion to helping ease the recession and credit crisis. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 1,029.3 metric tons yesterday.

“The safe-haven trade is the major reason people are buying gold now,” said James Turk, founder of GoldMoney.com, which has $608 million of gold and silver in storage for investors as of today. “Within six months or so people will be buying gold for another reason -- to protect themselves against inflation.”

Silver Outlook

Silver may rise as a cheaper alternative to gold, analysts have said. Before today, the metal had lost 31 percent in the past year while gold had declined 0.7 percent.

Gold reached $1,007.70 on Feb. 20, the highest price for a most-active contract since March 18. Gold touched a record $1,033.90 on March 17.

Silver futures for May delivery rose 13.5 cents, or 1 percent, to $13.11 an ounce in New York. The most-active contract fell 9.5 percent for the week, the first decline since Jan. 16.

Platinum futures for April delivery rose $32.20, or 3.2 percent, to $1,085.30 an ounce on Nymex. The most-active contract fell 0.9 percent for the week, the first drop since Jan. 16.

Palladium futures for June delivery fell $2.45, or 1.2 percent, to $195.70 an ounce.