Gold Falls, Halts 2-Day Rally as Demand Wanes; Silver Declines

March 9 (Bloomberg) -- Gold futures fell as some investors sold the precious metal following a two-session rally. Silver also declined.

Investment demand in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, stalled after reaching a record 1,029.3 metric tons on Feb. 26. Gold rose 4 percent in the previous two sessions in New York after declining for eight straight days. On Feb. 20, the metal topped $1,000 an ounce for the first time in 11 months.

“It seems reasonably wise to reduce our gold holdings once again on this recent strength,” Dennis Gartman, an economist and the editor of the Gartman Letter in Suffolk, Virginia, told his clients today. “Unless there is a sudden upward shift in gold holdings by the ETFs, weak demand for jewelry will weigh upon the gold price.”

Gold futures for April delivery fell $24.70, or 2.6 percent, to $918 on the New York Mercantile Exchange’s Comex division. The price rose 20 cents last week.

Silver futures for May delivery fell 39.3 cents, or 2.9 percent, to $12.94 an ounce on Comex. The price gained 1.7 percent last week.

Most-active gold futures still are up 3.8 percent this year, while silver futures have risen 15 percent.

Investment in the SPDR Gold Trust fell to 1,028.99 tons on March 6. Investment in the ETF is up 32 percent this year.

Driving Gold

“One of the biggest drivers for gold has been equity weakness,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. “The ETFs have not been growing. Equities aren’t falling apart today. So some of that ETF money is looking at the S&P.”

The Standard & Poor’s 500 Index rose as much as 1.7 percent before erasing gains.

Gold also fell as the dollar strengthened. The U.S. Dollar Index, a gauge that includes the euro and yen, gained as much as 1.1 percent.

The precious metal and the U.S. currency generally move in the opposite direction. The correlation hasn’t held this year as investors bought both assets as havens against deterioration in other financial markets.

“As long as we had inflows into the ETFs, gold traders didn’t care about dollar strength,” Lesh said.

Still, gold’s losses may be limited as investors seek a store of value as equity markets struggle. Major stock indexes in the U.S. and Europe have declined for four straight weeks.

The U.S. economy “has fallen off a cliff” and the government’s effort to revive growth is “potentially very inflationary,” billionaire Warren Buffett said today in a CNBC television appearance. He said inflation could exceed rates last reached in the 1970s.

Haven for Value

“Further weakness and volatility in global stock markets sparked by disappointment in the political landscape and worries about insurance companies should also boost gold prices, as traders migrate toward investments that are not only less volatile, but also are seen as holding their value,” said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago.

Gold and oil will be the best-performing commodities this year, according to a survey of investors by Barclays Capital.