Gold Drops Most in Three Weeks as Stronger Dollar Saps Demand

By Nicholas Larkin

Dec. 19 (Bloomberg) -- Gold fell the most in almost three weeks in London as the dollar strengthened against the euro, reducing bullion’s appeal as an alternative investment to the U.S. currency.

Oil headed for its second-biggest weekly decline in more than five years as a deepening global recession saps demand, dimming the metal’s allure as a hedge against inflation. The dollar is rebounding from a 12-week low set this week when the Federal Reserve slashed interest rates. Gold typically moves inversely to the U.S. currency.

“If the dollar strengthens, gold tends to get sold off,” said Dan Smith, a Standard Chartered Plc analyst in London. “The reduction in the oil price also makes people less worried about inflation.”

Gold for immediate delivery lost as much as $19.43, or 2.3 percent, to $833.47 an ounce and traded at $839.90 by 11:30 a.m. in London. February futures fell $20.40, or 2.4 percent, to $840.20 in electronic trading on the Comex division of the New York Mercantile Exchange.

The metal declined to $839 in the morning “fixing” in London used by some mining companies to sell production, from $855.25 at the afternoon fixing yesterday. Bullion, still heading for a second weekly gain in London, is little changed this year. It reached a record $1,032.70 an ounce in March.

The dollar today gained as much as 1.7 percent against the euro, while crude oil slid as much as 7.5 percent to $35.62 a barrel in New York.

Currency Conundrum

The euro will fall about 10 percent against the dollar in the next three months as demand for safety and economic weakness in Europe boosts demand for the U.S. currency, UBS AG and Barclays Capital said. James Moore, an analyst at TheBullionDesk.com, expects the dollar’s rally to peter out.

“Given the recessionary fears still overhanging the U.S. economy we anticipate the dollar will remain pressured for some time,” Moore wrote in a note today. With the year-end and the Christmas holiday period approaching, traders will be “torn between locking in profits, maintaining sufficient cash liquidity and factoring safe-haven protection into their portfolios,” he said.

Among other metals for immediate delivery in London, silver declined 1.6 percent to $10.80 an ounce. Platinum lost $6.75, or 0.8 percent, to $847.25 an ounce, and palladium was 0.3 percent higher at $178.

Auto Bailout

Forecasts for platinum and palladium, both used in auto catalysts, were cut by Troika Dialog on a worsening manufacturing outlook and falling demand from carmakers.

Platinum will average $930 an ounce next year, down from a previous forecast of $1,685 an ounce, the Moscow-based bank said in a report today. Palladium will average $210 an ounce, down from $421 an ounce, it said.

General Motors Corp. and Chrysler LLC are set to get U.S. loans to stay afloat until March under a U.S. government plan that may be unveiled as soon as today, people familiar with the talks said. The companies have said they need $14 billion to stay in business through March and are temporarily idling plants to trim expenses.

Automakers account for about half of global platinum and palladium consumption, according to estimates by Johnson Matthey Plc, a London-based metals refiner, trader and researcher. The figures take recycling into account.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net