Gold, Silver Fall as U.S. Producer Prices Rise Most Since 1981

By Pham-Duy Nguyen

Aug. 19 (Bloomberg) -- Gold fell on speculation surging U.S. producer costs will spur the Federal Reserve to raise interest rates, boosting the dollar and eroding the metal's appeal as an alternative investment. Silver also declined.

Prices paid by U.S. producers surged 9.8 percent in the year through July, the biggest jump since June 1981, the Labor Department reported today. The dollar climbed as much as 0.4 percent against the euro after rising 5.8 percent this month. Gold set a record in March as interest-rate cuts pushed the dollar toward an all-time low against the euro, reached last month.

``Higher inflation used to mean higher gold prices,'' said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. ``Now higher inflation means higher rates are coming, which means a stronger dollar and lower gold prices. Rates have to go up. One thing the Fed is really scared of is inflation.''

Gold futures for December delivery fell $10.50, or 1.3 percent, to $795.20 an ounce at 9:55 a.m. on the Comex division of the New York Mercantile Exchange. Before today, the metal dropped 22 percent from a record $1,033.90 set March 17, including a 13 percent decline this month.

Silver futures for December delivery fell 29.2 cents, or 2.2 percent, to $12.925 an ounce on the Comex. Silver had fallen 11 percent this year before today while gold lost 3.9 percent.

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