Gold Heads for Biggest Weekly Decline Since 1983; Silver Drops

May 19 (Bloomberg) -- Gold headed for its biggest weekly decline in 23 years and silver plunged as the dollar rallied, damping demand for precious metals as an alternative investment. Palladium fell as much as 9.9 percent.

Gold, after reaching a 26-year high of $730.40 an ounce on May 12, has since dropped 7.8 percent in London, the first drop since the week ended March 10. The decline may signal an end to a rally in metals that included a doubling of copper prices ion the past year to a record $8,800 a metric ton this month.

``You're just running out of new buyers,'' said Michael Guido, director of hedge fund marketing and commodity strategy at Societe Generale in New York. ``They're not getting long on gold at $700. Copper at $8,200 in London just seems a little too rich. Everyone wants to see a pullback because they want to get back into the market.''

Gold for immediate delivery dropped $23.30, or 3.4 percent, to $659 an ounce at 5:49 p.m. in London. A close at that price would mark the biggest weekly drop since the last week of March 1983, when gold lost 11 percent. Gold futures for delivery in June fell $22.20, or 3.3 percent, to $658.70 at 12:49 p.m. on the Comex division of the New York Mercantile Exchange.

The Reuters-Jefferies CRB Index of 19 commodities was down 4.8 percent for the week to 344.54. A close at that level would be the biggest weekly drop since July 1988.

Dollar's Gains

The slump today was sparked by a gain in the dollar against the euro and yen on speculation the Federal Reserve may raise interest rates to rein in inflation, said Daniel Vaught, a commodities analyst at A.G. Edwards & Son Inc. in St. Louis.

The dollar gained to $1.2745 versus the euro and 111.71 against the yen. U.S. central bankers are less likely to pause their rate increases as previously planned because a report this week that showed consumer prices rose more than forecast, Richmond Fed President Jeffrey Lacker said yesterday.

Inflation is off to the worst start to a year since 1990, a government report showed, rising at an annual rate of 5.1 percent in the first four months.

The Fed has raised borrowing costs at every meeting since June 2004, bringing the 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.

``Such a move would make investments in bonds more attractive, putting in turn pressure on non-interest bearing assets like precious metals,'' said Wolfgang Wrzesniok-Rossbach, head of marketing and sales at Heraeus Metallhandels GmbH in Hanau, Germany.

Investor Demand

Gold futures in New York are up 27 percent this year and reached a 26-year high of $732 last week as investors bought the metal as a haven amid tensions between the U.S. and Iran over the latter's nuclear program and as funds diversify.

A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

Commodity prices are about 50 percent higher than they would be if they were based on the fundamentals of supply and demand, as a surge of investment sent prices for metals and energy to record highs, Merrill Lynch & Co. said yesterday.

Silver for immediate delivery fell 31 cents, or 2.4 percent, to $12.36 an ounce in London. A close at that price would be the lowest since April 24.

Risk of Declines

Silver ``remains the most at risk of the complex for further downside price movement,'' James Moore, a Kettering, U.K.-based analyst, at TheBullionDesk.com said in a report.

Barclays iShares Silver Trust, which is linked to the price of the metal, started trading on April 28, initially boosting demand for silver. Silver rose 8.5 percent on that first day of trading in the iShares trust, and since has dropped 9 percent.

``Silver lost a bit of momentum now and has a bit of impact on gold,'' said Stephen Briggs, an analyst at Societe Generale in London. ``The same piece of news can't be recycled forever.''

Palladium for immediate delivery fell $27, or 7.3 percent, to $342.50 an ounce in London. Palladium is up 33 percent this year, just ahead of the 32 percent rise for platinum.

Palladium production will exceed demand this year for a sixth year on expanding mine output in South Africa, Johnson Matthey said on March 15.

Prices are being driven higher by buying from hedge funds rather than supply and demand rather supply and demand, Johnson Matthey, the world's largest distributor of platinum group metals said. Hedge funds influencing the market hold ``several million ounces,'' Johnson Matthey said.

In contrast, platinum is expected to be in shortage for the eighth straight year.

``Palladium, which has been piggy-backing on gains in platinum, is not as fundamentally bullish,'' Vaught said.