Source: Bloomberg
New York— Gold fell to a six-week low on speculation the U.S. Federal Reserve will continue raising rates to curb inflation, eroding demand for the precious metal as an alternative to bonds.
Traders are more confident that the Fed will raise interest rates to stem accelerating consumer prices, after concern about inflation helped send gold to a 26-year high last month. Investors traditionally buy gold as a hedge against inflation.
“Interest rates are going up and people can earn higher returns than they could a year ago,'' said Ron Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. “Why would you want to be involved in something so volatile and risky as gold?''
Gold futures for delivery in August fell $2.10, or 0.3 percent, to $632.60 on the Comex division of the New York Mercantile Exchange, the lowest closing price for the most- active contract since April 24.
Gold has outperformed bonds so far this year, gaining 21 percent, while holders of U.S. Treasuries have lost 1 percent. Prices have fallen 14 percent since reaching $732 on May 12. Gold is still up 48 percent from a year ago.
“There's a good possibility that gold has peaked,'' said Goodis. “So people who say gold will reach the 1980 high of $850, they might be waiting another 25 years.''
Inflation Forecast
Investors expect inflation to average 2.67 percent, according to yield differences on five-year Treasury Inflation Protected Securities and Treasury notes of similar maturity, up from 2.27 percent at the start of this year. Gold futures reached a record $873 an ounce in 1980 when consumer prices rose about 12 percent.
Gold has fallen this week after Fed Chairman Ben Bernanke and Fed St. Louis President William Poole both suggested that rates may have to rise to combat inflation.
“Comments from the Fed are all pointing to their willingness to tackle inflationary pressure,'' said Stephen Platt, a commodities analyst at Archer Financial Services Inc. in Chicago. “Gold is certainly under pressure in response to that.''
U.S. interest-rate futures show traders are pricing in an 84 percent chance the Fed will lift its key rate a quarter percentage point to 5.25 percent later this month, up from 40 percent at its last meeting May 10.
Dollar, Volatility
Speculation rates will rise also helped strengthen the dollar against the euro. Gold traditionally moves in the opposite direction of the dollar. That relationship changed last year when gold rose 18 percent even as the dollar gained about 14 percent against the euro. Analysts say the inverse relationship has resumed this year.
“The dollar is stronger after the Bernanke speech a few days ago,'' said Mario Innecco, a futures broker at Man Financial Ltd. in London. “People seem to think now that the Fed might hike again and gold may trend down.''
Wide price fluctuations have also kept some investors out of the market. Gold's historical volatility, or rate at which a price moves up or down, the past 10 days more than doubled since the Fed's last policy meeting, according to data compiled by Bloomberg. Prices fluctuated by 40.58 percent in the past 10 days, compared with 19.15 percent in the same period to May 10.
Pared Losses
Gold pared its loss as some investors snapped up bullion after prices reached $621.50 earlier in the session. Peter Grandich, publisher of the Grandich Letter, a financial newsletter in Perrineville, New Jersey, advised his clients to jump back into precious metals when gold reached the low $620s.
“The secular bull market in precious metals is far from over,'' Grandich said. “At best, we're in the fourth or fifth inning. Most of the wild speculation is over.''
Silver for July delivery rose 4.5 cents, or 0.4 percent, to $11.89, after dropping to $11.43 in intraday trading, the lowest since March 31.
A $100 drop in gold prices over the past month lured bargain hunters back to the market, analysts said.
“The risk reward here is not to sell the market after it's dropped $100 in a month,'' said Michael Guido, director of hedge fund marketing and commodity strategy at Societe Generale in New York. “The sentiment in the market was, `When do we buy in this market?' not `When do we sell?'''
Demand for gold will still outpace supply, some analysts said. Glamis Gold Ltd., which mines the precious metal in Central America, yesterday cut its 2006 production forecast by 7.5 percent. Demand for gold last year was 3,754 metric tons. Mine production stood at 2,494 tons, according to the producer- funded World Gold Council.
Central Banks
Gold may also gain should central banks buy the metal to diversify out of foreign currency holdings, some analysts said. A committee member of the People's Bank of China said on June 1 the
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