Gold, Silver Fall to 1-Week Lows as Slow Inflation Cuts Demand

April 16 (Bloomberg) -- Gold and silver fell to the lowest prices in a week on speculation that the pace of inflation will be slower than investors expected, eroding demand for the precious metals as a store of value.

U.S. consumer prices slipped in March to the first 12-month decline since 1955, the Labor Department said yesterday. The euro declined for a third straight day against the dollar, the longest losing streak in six weeks, as industrial output fell. Gold jumped 7.8 percent on March 19 on concern that the Federal Reserve’s plans to buy government debt would reignite inflation.

“Gold is showing signs of weakness amid the drop in prices of goods to consumers, indicating that inflation has yet to rear its head,” Miguel Perez-Santalla, a sales vice president at Heraeus Precious Metals Management in New York, said in an e- mailed note. “Investor- and industrial-demand remain weak at these levels as well.”

Gold futures for June delivery fell $13.70, or 1.5 percent, to $879.80 an ounce on the Comex division of the New York Mercantile Exchange, after touching $877.60, the lowest since April 9. Gold is down 7.2 percent from a year ago.

“With gold prices continuing to be capped under $915 an ounce, I would look for the market to roll over and play bear,” Ralph Preston, a commodity analyst at Heritage West Futures Inc. in San Diego, said in an e-mail. “A close under $853 an ounce projects another move down towards $800 an ounce.”

Silver futures for May delivery slid 54.5 cents, or 4.3 percent, to $12.255 an ounce on the Comex, after reaching $12.165, the lowest since April 9. The price is down 33 percent from a year ago.

India Demand

Still, some analysts say gold may be poised to rebound.

“Any major further correction in gold will see solid buying -- and that if no correction occurs, Indian demand will pick up strongly in August/September,” John Reade, UBS AG’s head metals strategist in London, said today in a report.

India, the world’s biggest buyer of gold, imported 10 metric tons in the first 15 days of April, compared with 24 metric tons in all of April 2008, Reuters reported from Mumbai yesterday, citing Suresh Hundia, head of the Bombay Bullion Association Ltd. India didn’t import any gold last month, compared with 21 tons in March 2008, according to the bullion association, a group of 230 traders.

Investors buy gold and other precious metals as a hedge against accelerating consumer prices and a weakening dollar. Investment demand for precious metals slows when consumer prices fall and the dollar strengthens.

Dollar-Euro

The dollar gained as much as 0.8 percent against the 16- nation euro, which traded at $1.3172 at 2:50 p.m. in New York. The European Union’s statistics office said industrial output in the euro region fell 18.4 percent in February from a year earlier, the biggest drop since at least 1986, when the data begin.

The European Central Bank hasn’t decided whether to follow its counterparts in the U.S. and the U.K. in using printed money to buy assets, a measure known as quantitative easing.

Gold may trade near $800 by summer, based on trader sentiment, Perez-Santalla said.

This year, gold futures traded as low as $801.50 on Jan. 15 and as high as $1,007.70 on Feb. 20.