Gold Falls, Heading for Second Weekly Drop, on Rates Outlook

May 26-- Gold fell, heading for a second headed for a second weekly decline, on speculation higher U.S. interest rates will erode the appeal of the metal as an alternative investment.

Prices are down 12 percent in New York since reaching a 26- year high of $732 an ounce on May 12. Investment so far this month in StreetTracks Gold Trust fell 15.3 tons, or 4 percent, the most since the trading began in November 2004. Each share of the exchange-traded fund represents a 10th of an ounce of gold.

``Gold is like a roller coaster,'' said Christoph Eibl, the head of commodities trading at Tiberius Asset Management AG in Zug, Switzerland. ``Gold is solely driven by investor demand and some investors are taking profit.'' Prices will keep falling next week, he said.

Gold for immediate delivery fell $6.70, or 1 percent, to $644.20 an ounce at 3:34 p.m. in London. On the Comex division of the New York Mercantile Exchange, gold futures for June delivery fell $4.50, or 0.7 percent, to $644 at 10:35 a.m.

Prices are down 2 percent this week in London, after tumbling 8 percent last week, which was biggest drop in more than 15 years. Two straight weeks of declines would be the first since December. Gold is still up more than 24 percent this year.

``In many cases, you have an entire investment community that has never seen this level of volatility in gold,'' said Frank McGhee, the head metals trader at Integrated Brokerage Services LLC in Chicago. ``Probably the best piece of advice in these markets is to pare back your trading. Because of the volatility, you can get the same level of return for a small investment and take a lower level of risk.''

Interest Rates

The U.S. Federal Reserve has raised borrowing costs at every meeting since June 2004, bringing its key rate to 5 percent, the highest in more than four years. Analysts expect the Fed to increase rates again at its meeting on June 29.

Higher interest rates encourage investments in bonds and put pressure on non-interest bearing assets like precious metals.

StreetTracks fund accounts for 343.29 tons of gold, or about 78 percent of total the investments in exchange-traded funds linked to the precious metal. Prices are up 54 percent in the past year partly on investment demand and amid geopolitical tensions created by Iran's nuclear program.

The U.S. says Iran is trying to develop a nuclear bomb. Escalating tensions have led to concern the UN may impose a trade embargo on Iran, the world's fourth-largest oil producer.

Gold rose to a record $850 an ounce in January 1980 when the 1979 Iranian revolution cut oil exports.

More Weakness

``We will probably see a little bit more weakness'' in gold prices, said David Thurtell, a commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney. ``Iran has been a significant issue in psyching demand into gold the past couple of months. It again depends a lot on what Iran does.''

Gold may fall below $600 if Iran ``backs away'' from its plans, easing concern about a possible confrontation with other countries, he said.

Iranian President Mahmoud Ahmadinejad on May 24 said his country has the right to develop atomic energy and that any aggressors trying to stop it would get ``a lasting and historic slap.''

Integrated Brokerage's McGhee said prices may still go higher, and that $1,000 is possible.

``All the long-term fundamentals that put this market here are still intact,'' he said. ``When gold got over $700 an ounce, you basically had the commercial side of the industry's appetite for the metal start to dry up. With the correction down in the $60, $80 break, we're starting to see commercial interest come back in and start to move physical product again.''