Gold Drops to Seven-Week Low as Dollar May Rally on U.S. Growth

Dec. 22 (Bloomberg) -- Gold prices fell to a seven-week low on speculation that an improving U.S. economy will help extend this month’s rally in the dollar and reduce demand for precious metals as an alternative investment.

The U.S. grew at a 2.2 percent rate in the third quarter, the fastest pace in two years, the government said today. Gold has fallen 8.1 percent this month as signs of economic expansion spurred a 4.4 percent gain in the dollar against a basket of six currencies. The greenback is headed for its first monthly increase since June.

“The trend is your friend, and the trend right now is for lower gold prices as the dollar gains,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois.

Gold futures for February delivery fell $9.30, or 0.8 percent, to $1,086.70 an ounce on the New York Mercantile Exchange’s Comex unit. Earlier, the price dropped to $1,075.20, the lowest level for a most-active contract since Nov. 3.

The U.S. Dollar Index, a six-currency basket that often moves in the opposite direction of gold, rose as much as 0.5 percent and has rallied for three straight weeks.

“There’s not a huge move in the dollar today, but it doesn’t take away from the fact that the overall trend is lower” for gold prices, Kaplan said.

Bullion has gained 23 percent this year as the longest recession since World War II eroded the dollar and boosted demand for gold as a haven. The metal yesterday settled more than 10 percent below its record closing price of $1,218.30 an ounce, a slump that some analysts consider a correction.

‘Urge to Square Up’

“One can never underestimate the power of the urge to square up, to take one’s trading lumps and to reduce collective exposure,” Dennis Gartman, a Suffolk, Virgina-based economist and hedge-fund manager, told clients in his Gartman Letter today.

Investors should “stay long gold” in the first half of next year on concern that the pace of U.S. inflation will accelerate and because jewelry demand will recover, Andrey Kryuchenkov, a VTB Capital analyst in London, said today in a report. The metal will average $1,100 to $1,150 next year, he said.

Gold for immediate delivery in London fell 0.5 percent to $1,087.80 an ounce at 7:09 p.m. local time.

Silver for March delivery was little changed, falling 0.5 cent to $17.03 an ounce on the Comex in New York. Platinum for April delivery declined 1.8 percent to $1,402.90 an ounce on the Nymex, and palladium for March delivery slipped 3.1 percent to $354.25 an ounce.