Gold, Silver Rise on Speculation Fed Won't Raise Rates Soon

By Pham-Duy Nguyen

June 18 (Bloomberg) -- Gold and silver rose on speculation that a slowing U.S. economy will deter the Federal Reserve from raising borrowing costs, boosting the appeal of precious metals as alternative investments to the dollar.

Financial futures show a 12 percent chance the Fed will raise the benchmark interest rate by 0.25 percentage point to 2.25 percent next week, compared with a 26 percent chance yesterday. Gold rallied 39 percent from Sept. 17 to March 17 as the Fed reduced rates from 5.25 percent.

``The odds of rate increases have gone down,'' said Matt Zeman, a trader at LaSalle Futures Group in Chicago. ``We're still losing jobs, and housing is incapable of turning around. The dollar has very limited upside potential.''

Gold futures for August delivery rose $6.60, or 0.7 percent, to $893.50 an ounce on the Comex division of the New York Mercantile Exchange.

Silver futures for July delivery rose 26.5 cents, or 1.6 percent, to $17.34 an ounce. The price has advanced 16 percent this year, while gold climbed 6.6 percent.

Silver has climbed 2.9 percent in the past week. A drop to $16 or a rally above $18.20 will attract buyers, Zeman said.

Gold generally moves in the opposite direction of the dollar, which was little changed against a weighted basket of six major currencies after dropping 0.9 percent in the previous two days.

Home Foreclosures

The Mortgage Bankers Association this month reported that the number of Americans in danger of losing their homes to foreclosure rose to the highest in at least three decades during the first quarter as borrowers who fell behind on payments were unable to sell their properties.

Investors also purchased precious metals to hedge against inflation. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials climbed for a sixth straight session to a record 1650.68. Gold reached an all-time high of $1,033.90 an ounce on March 17, and crude oil, gasoline, copper, corn, soybeans and wheat climbed to records this year.

``There's a tremendous amount of inflation percolating through this system,'' said Frank McGhee, the head metals trader at Integrated Brokerage Services LLC in Chicago. ``Any weakness in the dollar and strength in crude will allow gold to rally significantly.''

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

Last Updated: June 18, 2008 14:20 EDT

Taken From :http://www.bloomberg.com