Gold Falls on Speculation China May Raise Rates, Damp Demand

March 12 (Bloomberg) -- Gold in New York fell to the biggest weekly loss in seven weeks on speculation that China will raise interest rates to control inflation, reducing demand for raw materials including precious metals.

Consumer prices in China rose 2.7 percent in February, the most in 16 months, the government said yesterday. The Reuters/Jefferies CRB Index of 19 commodities slumped today, led by energy contracts, and has dropped every day this week. Accelerating growth in China last year and low interest rates helped send gold to a record $1,227.50 an ounce on Dec. 3.

“There’s a lot of chatter that you’ll have rate hikes out of China,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “If China raises rates, that’s going to damp demand for raw materials. Gold and oil are going to be sensitive to this.”

Gold futures for April delivery fell $6.50, or 0.6 percent, to $1,101.70 an ounce on the Comex in New York, leaving the most-active contract down 3 percent this week, the biggest weekly drop since Jan. 22.

Gold may extend declines should the U.S. economic recovery spur the Federal Reserve to raise interest rates before the European Central Bank, boosting the value of the dollar.

Sales by U.S. retailers climbed unexpectedly in February from January, the Commerce Department said today. Last year, gold rallied 24 percent as the Fed kept its benchmark interest rate near zero to revive the economy. The ECB’s main rate is at 1 percent.

Euro Weakness

Before today, the euro dropped 4.5 percent this year against the dollar after gaining 2.5 percent in 2009. This year’s slump is partly because investors are concerned that the effect of Greece’s budget difficulties on its debt may spread to other European Union countries.

“The dollar looks to get stronger,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “We’ve seen the dollar has not fallen out of bed, while the Greek problem is serious and will weaken the euro.”

Investors generally purchase the metal, priced in dollars, to hedge against declines in the U.S. currency.

In other markets, silver futures for May delivery fell 11.2 cents, or 0.7 percent, to $17.048 an ounce on the Comex, leaving the most-active contract down 1.9 percent for the week.

Platinum for April delivery fell $4.30, or 0.3 percent, to $1,608.40 an ounce on the New York Mercantile Exchange. The metal climbed 1.9 percent this week, the second straight gain. Palladium for June delivery rose $2.15, or 0.5 percent, to $463.15 an ounce on the Nymex. The metal slid 2.8 percent this week, the second decline in three weeks.