Gold Heads for First Weekly Drop in Five on Deflation Concerns

By Glenys Sim

Dec. 5 (Bloomberg) -- Gold is poised for its first weekly drop in five on concern that the world may be entering a period of deflation, reducing the appeal of the metal as a hedge against rising consumer prices.

The cost of living in the U.S., the world's largest economy, fell by the most on record in October, while Europe's inflation rate fell by the most in almost two decades in November. Falling commodity prices, especially energy prices, have changed fears of inflation to fears of deflation, said Morgan Stanley.

``Deflation risks are overbought in our view,'' the bank's analysts led by Hussein Allidina, said in an e-mail today.

Bullion for immediate delivery traded little changed at $769.59 an ounce at 10:43 a.m. in Singapore. Gold for February delivery in after-hours electronic trading on the Comex division of the New York Mercantile Exchange rose 0.5 percent to $769.30.

``The crisis is not over,'' said Allidina. ``Gold prices should continue to be confusing and ambivalent in the near-term. Longer term, a combination of low mine production, weak official sales and growing global consumer and investment demand implies a secular bullish trend for gold,'' he added.

Gold for October delivery dropped 0.5 percent to 2,279 yen a gram ($766 an ounce) on the Tokyo Commodity Exchange, and Shanghai gold for June delivery was almost unchanged at 168.51 yuan a gram ($762 an ounce).

Equities Decline

The MSCI Asia Pacific Index is headed for a weekly fall, with measures of raw-materials and energy producers posting the biggest declines among the 10 industry groups. Gold has fallen 6 percent this week as the index slipped 3.5 percent.

``Deleveraging and fund redemptions have played a significant role in capping gold's upside,'' said Allidina. ``In response to market losses, investors have sold otherwise good and liquid investments such as gold in an attempt to have cash on hand for margin calls and redemptions.''

Helping limit gold's losses was a pause in the U.S. dollar's rally. The dollar headed for a fifth weekly decline against the yen, and a second weekly loss versus the euro, before a U.S. report that economists say will show the unemployment rate rose to the highest level since 1993, giving the Federal Reserve more reason to cut interest rates.

Among other precious metals for immediate delivery, silver, platinum and palladium traded little changed at $9.55 an ounce, $802 and $170.50.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net