Gold Falls as Inflation Concerns Wane on Deepening Global Slump

June 22 (Bloomberg) -- Gold prices slid to a five-week low after the World Bank forecast a deeper contraction in the global economy this year, curbing the appeal of the metal as a hedge against inflation. Silver also dropped.

The U.S. Dollar Index, a gauge of the greenback’s value, against six currencies, rose as much as 0.8 percent after the Washington-based lender said the global recession will be deeper than it forecast in March, fanning demand for dollars as a refuge and curbing inflation worries. Crude oil slid for a second session. Some investors buy gold as an inflation hedge.

“Concerns about inflation have abated for the time being,” John Gross, the president of J-E Gross & Co., a metal- industry consultant in Rhode Island, said today by e-mail. Gross has been trading metals for more than three decades. “Gold is now testing the May low at $900, with a more important test shaping up at $860.”

Gold futures for August delivery slid $15.20, or 1.6 percent, to $921 an ounce on the New York Mercantile Exchange’s Comex division. Earlier, the price touched $918.30, the lowest for a most-active contract since May 19. The metal fell 0.5 percent last week, the third consecutive drop and the longest span of weekly declines since mid-April.

Silver futures for July delivery fell 49.7 cents, or 3.5 percent, to $13.703 an ounce on the Comex. Earlier, the price reached $13.68, lowest for a most-active contract since May 18.

Spot Silver Falls

Silver for immediate delivery slipped 45 cents, or 3.2 percent, to $13.775 an ounce at 8:42 p.m. in London. ETF Securities Ltd.’s silver holdings slipped 0.8 percent to 20 million ounces as of June 19.

“Silver-price momentum has been driven by strong investor interest,” Suki Cooper, a Barclays Capital analyst in London, said today in a report. “If positive sentiment starts to fade, prices could come under significant downward pressure. Consumption in the key U.S. market shows little sign of improving in the near term.”

Gold fell as the strengthening dollar and falling energy prices diminished the metal’s appeal as a store of value.

Gold for immediate delivery slid $11.21, or 1.2 percent, to $922.84 an ounce at 8:43 p.m. in London. The metal earlier touched $918.40, the lowest since May 19.

“The dollar is stronger, and that is weighing on the metals,” said Alexander Zumpfe, a precious-metals trader at Hanau, Germany-based Heraeus Metallhandels GmbH. Crude oil slid to less than $70 a barrel in New York, which reduced demand for bullion as a hedge, he said.

Inflows Weaken

“There is no new money flowing in,” Zumpfe said. “Physical investors are not buying at current levels. Prices are stabilizing.”

The global economy will shrink 2.9 percent this year, the World Bank said, more than the 1.7 percent contraction it predicted in March.

Bullion dropped to $919.25 an ounce in the afternoon “fixing” in London, used by some mining companies to sell their output, from $924 this morning.

Gold held by the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was unchanged at 1,132.15 metric tons as of June 19, according to the company’s Web site. That’s the longest unchanged span since Nov. 11.

Hedge-fund managers and other large speculators decreased their net-long position, or bets prices will rise, in New York gold futures by 7 percent in the week ended June 16, according to U.S. Commodity Futures Trading Commission data.

Dollar Effect

“Further declines could occur in coming weeks, especially if the dollar retains a firm tone,” John Reade, a UBS AG analyst in London, said today in a report.

Federal Reserve officials start a two-day policy-setting meeting tomorrow. Reports due this week will update investors on U.S. economic statistics from durable-goods orders to personal income and spending.

“If the Fed sounds positive about the economy, the dollar may get stronger, leading to an accelerated slide in gold,” Pradeep Unni, a Richcomm Global Services analyst in Dubai, said today. The Fed cut its target overnight bank-lending rate to 0.25 percent to zero in December, and Chairman Ben S. Bernanke has suggested rates need to remain low to help revive growth.