Gold Falls to 6-Week Low on Speculation Interest Rates May Rise

June 7 -- Gold fell to a six-week low on speculation the U.S. Federal Reserve will continue raising rates to curb inflation, eroding demand for the precious metal as an alternative to bonds. Silver dropped to a two-month low.

Concern about accelerating inflation contributed to gold's rally to a 26-year high last month. U.S. interest-rate futures show traders are pricing in an 84 percent chance the Fed will lift its key rate a quarter-percentage point to 5.25 at its next meeting. Investors, who often buy gold as a hedge against inflation, are betting higher rates will stem inflation.

``Interest rates are going up and people can earn higher returns than they could a year ago,'' said Ron Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Why would you want to be involved in something so volatile and risky as gold.''

Gold futures for delivery in August fell $9.60, or 1.5 percent, to $625.10 at 10:41 a.m. on the Comex division of the New York Mercantile Exchange, after earlier reaching $621.30, the lowest since April 25.

Gold has outperformed bonds so far this year, gaining 21 percent while holders of U.S. Treasuries have lost 1 percent. Prices have fallen 15 percent since reaching a 26-year high of $732 an ounce on May 12. Gold is still up 46 percent from a year ago.

``There's a good possibility that gold has peaked,'' said Goodis. ``So people who say gold will reach the 1980 high of $850, they might be waiting another 25 years.''

Inflation Forecast

Investors expect inflation to average 2.67 percent, according to yield differences on five-year Treasury Inflation Protected Securities and Treasury notes of similar maturity, up from 2.27 percent at the start of this year. Gold futures reached a record $873 an ounce in 1980 when consumer prices rose about 12 percent.

Gold has fallen this week after Fed Chairman Ben Bernanke and Fed St. Louis President William Poole both suggested that rates may have to rise to combat inflation.

``Comments from the Fed are all pointing to their willingness to tackle inflationary pressure,'' said Stephen Platt, a commodities analyst at Archer Financial Services Inc. in Chicago. ``Gold is certainly under pressure in response to that.''

Speculation rates will rise also helped strengthened the dollar against the euro. Gold traditionally moves in the opposite direction of the dollar. That relationship changed last year when gold rose 18 percent even as the dollar gained about 14 percent against the euro. Analysts say the inverse relationship has resumed this year.

Dollar Strength

``The dollar is stronger after the Bernanke speech a few days ago,'' said Mario Innecco, a futures broker at Man Financial Ltd. in London. ``People seem to think now that the Fed might hike again and gold may trend down.''

Gold may also gain should central banks buy the metal to diversify out of foreign currency holdings, some analysts said. A committee member of the People's Bank of China said on June 1 the country should use its foreign-currency reserves, the world's largest, to buy gold and oil. South Africa and Russia have also said they would like to increase their gold reserves.

``The trend in the gold market is upwards,'' Dennis Gartman, a gold trader and editor of Suffolk, Virginia-based newsletter the Gartman Letter, said in an interview today. ``Gold is being sponsored by second and third tier central banks who find themselves overly long of euros and dollars.''

Some central banks ``may prefer to hold for diversification purposes a bit more gold,'' Gartman said.

Silver for July delivery fell 22.5 cents, or 1.9 percent, to $11.62 on the Comex.