Gold Falls, Matching Longest Slide Since 2004, on Rate Concern

June 14 -- Gold fell for a seventh session, matching the longest slide since July 2004, on concern the Federal Reserve will continue to raise interest rates, eroding the appeal of gold as an alternative to U.S. stocks and bonds.

The metal has plunged 13 percent since June 2 and is down 23 percent from a 26-year high last month as the Fed signaled it may raise the benchmark rate from 5 percent to curb inflation. Fed Bank of Dallas President Richard Fisher today said policy makers must be ``relentlessly bird-dogging inflation'' after consumer prices in May rose more than expected.

``As long as we continue to see inflation, the Fed is going to continue raising rates,'' said Leonard Kaplan, President of Prospector Asset Management in Evanston, Illinois. ``Money will fly in from the moon for anything over 5 percent. There's no reason to hold gold. The market isn't done on the downside.''

Gold futures for August delivery fell 30 cents to $566.50 an ounce on the Comex division of the New York Mercantile Exchange, after earlier reaching $546.40, the lowest since March. Prices fell another $9 in after-hours trading to $557.50.

Higher borrowing costs make holding gold less attractive because the metal has no fixed returns, unlike bonds. Holders of U.S. Treasuries have gained about 1.4 percent this past month while gold has fallen 17 percent.

The Fed has lifted borrowing costs 16 times since June 2004, to 5 percent. Futures traders are pricing in a 100 percent chance the Fed will raise its benchmark interest rate a quarter- percentage point to 5.25 percent at the June 28-29 meeting of the Federal Open Market Committee, which sets rates. The odds were 90 percent yesterday. The chances of an August increase are about 40 percent.

Prices Fluctuations

Gold's recent price fluctuations have also deterred some buyers. From the start of the year to mid-May, gold jumped 39 percent as pension funds diversified into commodities and individuals piled into exchanged-traded funds.

The StreetTracks Gold Trust, a fund linked to the price of gold, has lost $1.7 billion in value from its record of $8.2 billion last month. The fund began trading in November 2004.

``I really need to see a second test of the lows,'' said Frank McGhee, head metals trader at Integrated Brokerage Services LLC in Chicago. ``I'm looking to be a buyer, but I'm not quite there yet.''

Gold rose to $575.50 earlier in the day, as some investors saw the lowest prices since March as an opportunity to buy. Yesterday's 7.3 percent decline was the most since gold dropped 7.4 percent on Jan. 17, 1991.

Safe to Buy

``The water is now safe once again to enter,'' Dennis Gartman, a gold trader, economist, and editor of the Suffolk, Virginia-based Gartman Letter, said in his daily report. ``Those not long of gold should be long and those long of it should be longer.''

The 14-day relative strength index on gold futures, a gauge of the momentum for the metal's gains or losses, fell to 27.25 yesterday, the lowest since July 14, 1997. It was the first time the index had fallen below 30 since May 2004. A reading below 30, which is derived from averaging gains or losses over 14 days, indicates prices are poised to rise.

``This sell-off is so exaggerated,'' said John Licata, chief investment strategist at Blue Phoenix Inc., an energy and precious-metals consulting firm in New York. ``This sell-off yesterday was another great buying opportunity for patient investors.''

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