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Gold $1097.10 - Down 2.5% as Dollar’s Rebound Reduces Metal Demand

By Pham-Duy Nguyen and Nicholas Larkin

Dec. 17 (Bloomberg) -- Gold tumbled 2.5 percent in New York as the dollar’s rebound eroded demand for the precious metal as an alternative investment.

The greenback rose to a three-month high against the euro on demand for a haven amid Greek debt concerns. The Federal Reserve said yesterday the U.S. economy is strengthening, a signal that policy makers may begin to raise interest rates next year from a record low. Gold jumped to a record $1,227.50 on Dec. 3 as the U.S. currency slumped.

“The dollar is beginning to scream,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “If the Fed raises rates, it’s over for gold.”

Gold futures for February delivery fell $28.80, or 2.5 percent, to $1,107.40 an ounce on the Comex division of the New York Mercantile Exchange, the biggest drop since Dec. 4.

Losses accelerated after the price dropped below the 50-day moving average of $1,106.59, based on yesterday’s settlement. The metal slid as low as $1,098 in electronic trading after the close today.

“This is a key level that people will be watching,” Zeman said. “A lot of people who are long have resting sell stops at the 50-day.”

The dollar has dropped 2.5 percent against the euro this year. The Fed maintained its benchmark rate at zero percent to 0.25 percent to revive the economy. The European Central Bank’s main rate is 1 percent.

Gold has gained 25 percent this year, heading for a ninth straight annual gain.

‘Big Days’

“Too many people are short of the dollar, and when they start to cover, the dollar could have a lot of big days,” Kaplan said. “I can’t see gold holding if the dollar rallies.”

The Fed said yesterday that most of its lending programs would expire as scheduled on Feb. 1 because of “improvements in the functioning of financial markets.” Policy makers said the labor market is stabilizing, and they affirmed a pledge to keep rates “exceptionally low” for an “extended period.”

“In times of crisis, where you don’t trust paper money and the financial system, then people like the physical aspect of holding gold,” Adrian Mowat, the chief Asian and emerging- markets strategist at JPMorgan Chase & Co., said in an interview on Bloomberg Television. “As we get a recovery, I think gold is going to look like a poor asset class as we go into next year.”

Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter, said the dollar is undergoing a “watershed shift in its trend, moving away from a protracted bear market to what is now a protracted, but almost wholly unexpected, bull market.”

He recommended owning gold priced in foreign currencies.

Silver for March delivery fell 49.8 cents, or 2.8 percent, to $17.195 an ounce in New York. The metal has gained 52 percent this year.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aytGs03Rxnn4