Gold May Resume Its Rally on Concern U.S. Dollar Will Weaken

May 29 -- Gold may rise, ending a two-week slide, on speculation a weaker dollar will prompt investors to resume purchases of bullion as an alternative asset.

Fifteen of 30 traders, investors and analysts from Sydney to Chicago advised buying gold, according to a Bloomberg News survey taken May 25 and May 26. Prices fell 1 percent last week to $651 an ounce in New York. Seven respondents advised selling and eight were neutral.

Investment demand for gold has sent prices up 25 percent this year, reaching a 26-year high of $732 on May 12, as the dollar fell against 13 major currencies including the euro and yen. Buying of exchange-traded funds backed by gold surged 23 percent in the first quarter to 109 metric tons, valued at $1.9 billion, the producer-funded World Gold Council said May 23.

Gold ``will continue to become the go-to currency,'' said Gregory Orrell, who manages $150 million including $110 million of gold stocks as the president of Orrell Capital Management Inc. in Livermore, California. The dollar may drop amid signs of a slowing U.S. economy as the housing market cools, he said.

Gold futures for June delivery fell $6.50 last week to $651 on the Comex division of the New York Mercantile Exchange. The decline was predicted by a majority of analysts surveyed May 18 and May 19. The Bloomberg survey has forecast the direction of prices accurately in 68 of 109 weeks, or 62 percent of the time.

Lockstep With Euro

The precious metal has moved almost in lockstep with the euro's performance against the dollar this year at a correlation coefficient of 0.92. The maximum reading is 1. The coefficient measures to what degree two variables move in unison.

``Gold is likely to continue its upward trend,'' said Alec Kim, manager at Korea Exchange Bank Futures Co.'s international marketing division. ``The dollar is still weak.''

The dollar may drop against the euro and the yen this week on concern U.S. economic expansion will slow, a separate Bloomberg survey of 51 currency traders and strategists showed.

The economy, which grew at an annual rate of 5.3 percent in the first quarter, may slow the rest of this year.

Morgan Stanley economists last week revised their second- quarter growth estimate to 2.8 percent from 2.9 percent, as a government report showed a smaller gain in spending and a bigger inventory gain. The economy will expand at a 3.5 percent rate this quarter and 3 percent in the second half, based on the median estimate of economists surveyed by Bloomberg April 28 to May 8.

Gold Coins

The rally in gold also has increased demand for coins and small bars in the U.S., which rose 41 percent in the first quarter from a year ago, the World Gold Council said.

``With all this activity in the metals, we're seeing increases in both'' bullion coins and rare coins, said Scott Travers, president of Scott Travers Rare Coin Galleries in New York. He expects gold to reach $800 by the end of this year.

Manufacturing growth slowed this month, economists said. The Institute for Supply Management's factory index probably fell to 55.6 in May from 57.3 in April, based on the median of 61 estimates in a Bloomberg survey. Readings above 50 indicate expansion. The institute's report will be released June 1.

Purchases of previously owned homes declined 2 percent in April to an annual rate of 6.76 million, the lowest in three months, the National Association of Realtors reported May 25. Sales were down 5.7 percent from a year earlier as rising mortgage rates put a brake on the housing market.

`No Froth'

The housing market has been integral to U.S. economic growth, and a slowdown will lead to a contraction in consumer spending and may prompt the Federal Reserve to cut interest rates in the first quarter of next year, Orrell said.

Hedge funds and other large speculators may resume buying of gold futures on the Comex, said Paul Yusem, an individual investor in Lombard, Illinois, who has traded gold futures for six years.

Speculative net-long positions, or bets that prices will rise, fell 12 percent to 111,098 gold futures contracts for the week ended May 23, the U.S. Commodity Futures Trading Commission said May 26. Speculators amassed 177,410 contracts in the week ended Oct. 11, the most since at least February 1983.

``Since the large speculator position is nowhere near the extreme reached in October, this is one measure indicating absolutely no froth in the gold market at all,'' said Yusem, who forecast gold will reach $875 this year.

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