Gold Pares Weekly Gain as Stronger Dollar, Rally Spur Sales

Oct. 9 (Bloomberg) -- Gold prices dropped, paring the biggest weekly advance since April, as a stronger dollar cut demand and some investors sold the metal to lock in gains from its climb to a record.

The U.S. Dollar Index rose as much as 0.8 percent, rebounding from the lowest level in almost 14 months, after Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to “tighten” U.S. monetary policy. Gold futures, up 4.4 percent this week, capped the biggest such gain since April 24, while the dollar is down 0.7 percent.

“Everybody is so bearish on the dollar and so bullish of gold, the market just had to turn,” said Matt Zeman, a LaSalle Futures Group metals trader in Chicago.

Gold futures for December delivery slipped $7.70, or 0.7 percent, to $1,048.60 an ounce on the New York Mercantile Exchange’s Comex division. Yesterday, the metal climbed to an all-time high of $1,062.70, setting a record for a third straight day.

Bullion for immediate delivery dropped $6.60, or 0.6 percent, to $1,048.50 an ounce at 7:50 p.m. in London.

“When the economic outlook has improved sufficiently, we will be prepared to tighten,” Bernanke said yesterday, according to the prepared text for remarks at a meeting in Washington. He echoed comments by Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, who said on Oct. 6 that waiting too long to raise interest rates “will foster an inflationary spiral.”

‘Key’ Phrase

“Those are key words for the gold market,” said Tom Pawlicki, an MF Global Inc. analyst in Chicago.

Gold gained more than sixfold from 1977 to 1980, touching a then-record $873 in January 1980 as the U.S. inflation rate topped 14 percent.

The Fed has kept its benchmark lending rate between zero and 0.25 percent since December to counter the effects of the recession. Consumer prices rose 0.4 percent in August and were down 1.5 percent compared with a year earlier, according to the Labor Department.

The 14-day relative-strength index for gold futures climbed above 70 on Oct. 7, a signal that prices may retreat. The index slid to 68.9 today.

“The likelihood that long-term dollar weakness will support gold does not obviate the fact that the near-relentless increase in bullion prices recently has raised the possibility that gold is due for a pullback,” James Steel, an HSBC Securities analyst in New York, said in a report e-mailed today. “A dollar rally, even if only temporary, could provide a reason for gold longs to take profits.”

Declining Net-Longs

Hedge-fund managers and other large speculators raised positions that would gain on rising New York futures to a record in the week ended Sept. 22, U.S. Commodity Futures Trading Commission data showed. Those bets were trimmed by 2.3 percent in the following week.

Holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by the metal, were unchanged at 1,109.31 metric tons as of yesterday, data on the company’s Web site showed. The trust’s holdings are 2.2 percent below the record of 1,134.03 tons reached on June 1.

Silver futures for December delivery fell 12.5 cents, or 0.7 percent, to $17.69 an ounce in New York, after touching a 14-month high of $17.955 yesterday.