Gold Heads for Biggest Monthly Drop Since 1983 as Dollar Gains

By Rachel Graham

Oct. 31 (Bloomberg) -- Gold headed for its worst monthly drop since 1983 in London as a strengthening dollar curbed demand for the metal as a hedge against weakness in the currency.

The metal has fallen 16 percent this month, the steepest retreat since February 1983, according to data on Bloomberg. The U.S. Dollar Index, which measures the U.S. currency's performance against six counterparts, has risen 7.9 percent this month, the best performance since October 1992.

``The dollar is definitely driving the gold market lower,'' Robert Martin, chief executive officer of Dubai-based GTL Trading Ltd., which trades gold and currencies for 4,000 clients, said by phone from Dubai.

Gold for immediate delivery fell $10.58, or 1.4 percent, to $727.54 an ounce as of 12:12 p.m. in London. Futures for December dropped $11.70, or 1.6 percent, to $726.80 an ounce on the Comex division of the New York Mercantile Exchange.

The metal is also falling on speculation that the global economy may be heading into a period of deflation, curbing demand for gold as an inflation hedge.

``There's a real concern about deflation; that's one of the reasons gold has moved,'' Martin said.

Europe's inflation rate declined to the lowest since January. Inflation in the euro area eased to 3.2 percent in October from 3.6 percent in September, the European Union statistics office said today.

``Deflation is more of a concern that it has been for some time,'' Simon Barry, an economist at Ulster Bank Ltd. in Dublin, said by phone. European inflation may drop to 1.6 percent by next summer, Barry said.

Platinum dropped $36.45, or 4.4 percent, to $794.05 an ounce. The metal, used in car catalysts, has slid 65 percent since trading at a record $2,301.50 on March 4.

UBS AG expects platinum to average $900 an ounce in 2009, below its previous forecast of $1,100, analyst John Reade wrote in a report today.

Among other metals for immediate delivery, silver fell 44 cents, or 4.5 percent, to $9.35 an ounce and palladium declined $9.50, or 4.7 percent, to $192.50.

To contact the reporter on this story: Rachel Graham in London at rgraham13@bloomberg.net