Gold Falls as Dollar Gain Curbs Demand for Hedge; Silver Drops

June 3 (Bloomberg) -- Gold fell the most in almost two months as the rebounding dollar curbed demand for the metal as an alternative investment. Silver also declined.

The U.S. Dollar Index, a six-currency gauge of the greenback’s value, rose for the first time in a week as investors sought the currency’s refuge after equities fell. Gold typically moves in the opposite direction of the dollar index, which yesterday fell to the lowest since Dec. 18.

Gold “is being driven still by the dollar,” said Wolfgang Wrzesniok-Rossbach, the head of marketing and sales at Hanau, Germany-based Heraeus Metallhandels GmbH. “The dollar has gained back and that’s the reason why gold is off the highs.”

Gold futures for August delivery tumbled $18.80, or 1.9 percent, to $965.60 an ounce on the New York Mercantile Exchange’s Comex division. That’s the steepest drop for a most- active contract since April 6. Gold earlier touched $992.10, the highest since Feb. 24.

Silver futures for July delivery fell 64.5 cents, or 4 percent, to $15.31 an ounce in New York, the sharpest decline for a most-active contract since April 28. Earlier, the metal reached $16.25, the highest price since Aug. 7.

Bullion for immediate delivery in London fell $18.82, or 1.9 percent, to $963.03 an ounce at 7:22 p.m. local time. The metal slipped to $976.75 in the afternoon “fixing” in London, used by some mining companies to sell their output, from $980 at yesterday’s afternoon fixing.

‘Overdue for Correction’

“The market is certainly overdue for a downside correction,” Tom Pawlicki, an analyst at MF Global in Chicago, said today in a report. “Longer-term, we still see the market as being supported, with an advance above $1,000 an ounce possible over the next few weeks. Support will come from weakness in the dollar and from ongoing inflows of investment to commodities.”

Gold futures last topped $1,000 on Feb. 20. The metal still has gained 9.2 percent this year as governments around the world sell more bonds to combat the recession, weakening currencies and potentially sparking future inflation.

“Excessive government spending and extremely large budget- deficit projections will cause metals markets to focus on the likelihood of higher interest rates,” Pawlicki said in the report. “These things suggest that precious metals will benefit from investment.”

Breakeven Rate

The 10-year U.S. breakeven rate, a gauge of inflation expectations, climbed above 2 percent for a second day today, signaling investors are concerned that consumer prices may accelerate. The extra yield investors demand to hold nominal securities instead of Treasury Inflation Protected Securities, or TIPS, rose to almost 2.03 percent today, the highest level since September.

“Gold has traditionally done well during periods of inflation and I believe we are entering a period of hyperinflation,” James Turk, the founder of GoldMoney.com, said today at a conference in London. “We are going to see clear signs of inflation by the end of the year. The Federal Reserve is trying to destroy the dollar to save the economy.”

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, remained at a record 1,134.03 metric tons as of yesterday, the company’s Web site showed.

“Maybe there will be a little bit of consolidation” today, Wrzesniok-Rossbach said. “I don’t think we’ve seen the highs of the current rally” and gold will likely reach $1,000 “in a matter of days,” he said.