Gold, Silver Fall as Bank-Asset Plan May Curb Demand for Metals

March 24 (Bloomberg) -- Gold fell the most in almost a week on speculation that a U.S. government plan to rid banks of toxic assets will revive lending and the economy, eroding the appeal of the precious metal. Silver also declined.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, dropped from a record yesterday for the first time since March 6. The U.S. Treasury’s latest bid to help banks boosted optimism that the economy will recover from the biggest recession since the Great Depression, spurring gold sales. Before today, gold rose 7.7 percent this year.

“Let’s not forget that gold is one of the best barometers of pessimism still out there,” said Jon Nadler, an analyst at Kitco Inc. in Montreal. Gold gained this year as investors bought the metal as a store of value against financial turmoil, analysts said.

Gold futures for April delivery fell $28.70, or 3 percent, to $923.80 an ounce on the Comex division of the New York Mercantile Exchange, the biggest decline for a most-active contract since March 18.

Silver futures for May delivery dropped 51.8 cents, or 3.7 percent, to $13.357 an ounce on the Comex. Silver still has gained 18 percent this year while gold is up 4.5 percent.

The precious metals fell as equities climbed in Europe and Asia, while in New York the Standard & Poor’s 500 Index pulled back from yesterday’s 7.1 percent gain. Still, the S&P pared an earlier drop of as much as 1.6 percent. Yesterday’s rally in U.S. equities was the biggest in five months.

Price Pressure

“Gold prices will face pressure from the stock market’s favorable reception of the Treasury’s plan to remove toxic assets from banks’ balance sheets,” said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago. “The strength could cause timid investment in gold to flow toward equities.”

Investment in the SPDR Gold Trust dropped from a record 1,114.6 metric tons to 1,114.3 tons yesterday. The fund still has grown 43 percent this year.

A decline in gold prices may present a buying opportunity for investors seeking a hedge against inflation, analysts said.

Last week, the Federal Reserve announced plans to expand its balance sheet by as much as $1.15 trillion to buy long-term debt and mortgages.

“Investors would be wise to buy some gold, whether or not gold goes up, down, or remains unchanged next week,” Tom Hartmann, a commodity analyst at AltaVista Worldwide Trading LLC in Mission Viejo, California, said on March 19. “The larger picture here is greater than a one-week time frame. Inflation is certain to come.”

The Reuters/Jefferies CRB Index of 19 commodities has climbed 5.1 percent in the past week, paced by an 8.6 percent rise in crude oil.