Gold May Rebound as Dollar's Slide Spurs Demand for Alternative

By Pham-Duy Nguyen

Nov. 20 (Bloomberg) -- Gold may rebound on speculation the Federal Reserve won't increase interest rates anytime soon, eroding the value of the dollar and boosting the appeal of the precious metal as an alternative investment.

Twenty-one of 32 traders, investors and analysts surveyed by Bloomberg from Sydney to Chicago on Nov. 16 and Nov. 17 advised buying gold, which fell 1.2 percent last week to $622.50 an ounce, the first decline in six weeks. Nine respondents said to sell the metal, and two were neutral.

A U.S. housing slump and the lowest oil prices in 17 months probably will discourage the Fed from changing its overnight lending rate, after two years of increases, analysts said. Gold rose 20 percent this year as the dollar fell 6.5 percent against a basket of major currencies, including the yen and euro.

``Speculators are putting more money to work in gold,'' said Michael Guido, director of hedge-fund marketing at Societe Generale in New York. ``The hedge-fund community thinks the dollar is going to weaken based on a Fed that's on hold.''

Gold for December delivery fell $7.60 an ounce last week on the Comex division of the New York Mercantile Exchange. The decrease surprised a majority of analysts who predicted a gain when surveyed Nov. 9 and Nov. 10. Bloomberg's survey has forecast the direction of prices accurately in 81 of 134 weeks, or 60 percent of the time.

The Fed hasn't raised rates since June 29 amid the worst housing slump in 15 years. Housing starts in the U.S. tumbled in October to the lowest since July 2000 and building permits dropped for the ninth straight month to the lowest since December 1997.

Producer, Consumer Prices

The Fed also may keep overnight loan rates at 5.25 percent because inflation pressure may be easing. The Labor Department said last week that prices paid to producers in October fell 1.6 percent, matching the biggest decline on record, and the consumer price index dropped 0.5 percent in October, following a decrease of 0.5 percent in September.

``There is no one we can find who is bullish on the dollar,'' said Dennis Gartman, a gold trader, economist and editor of the Suffolk, Virginia-based Gartman Letter. ``There is certainly nothing in the CPI report to suggest that the FOMC will err on the side of tighter policies when it meets again next month.''

Gold and the dollar often move in opposite directions. Gold has gained every year since 2001, more than doubling in the past five years. The dollar index rose last year after three consecutive annual declines as the Fed boosted rates to damp inflation.

``We believe gold has some real potential to move higher before year end,'' said Frederic Panizzutti, senior vice president in Geneva for MKS Finance, one of Switzerland's four gold refiners. ``The dollar remains the prevailing factor.''

Investor Demand

Analysts say investor demand for gold may rebound after dropping 10 percent in the third quarter to 111 metric tons, the lowest since the second quarter of 2005.

Hedge-fund managers and other large speculators increased their net-long position in Comex gold by 9.5 percent in the week ended Nov. 14, the U.S. Commodity Futures Trading Commission in Washington said Nov. 17. Speculative long positions, or bets prices will rise, outnumbered short positions by 88,834 contracts, up 7,668 from a week earlier, the commission said.

Gold's strength relative to crude oil is reviving speculative demand that helped spur gains in the first half of the year, some traders said.

Oil dropped more than 6.3 percent last week, touching $54.86 a barrel, the lowest since June 14.

`We Are Bullish'

Gold ``has held well in the face of a 17-month low in crude oil,'' said William O'Neill, a partner at commodity research firm Logic Advisors in Upper Saddle River, New Jersey. ``Long term, we are bullish.''

Since mid-May, gold has fallen 15 percent from $732 an ounce, which was the highest price since February 1980. Oil has tumbled 29 percent from a record $78.40 a barrel in mid-July and is down 8.6 percent this year.

Any further decline in oil will make gold retreat, some analysts said.

``If oil continues to slide, it will put a lot of pressure on metals,'' said Peter Tse, chief precious-metals dealer at ScotiaMocatta in Hong Kong, the bullion unit of Bank of Nova Scotia. ``If gold hits stops at $615 or even below, we might see a pretty big drop.''

Gold futures reached a record $873 an ounce in January 1980, after oil costs doubled in a year, sparking a 13 percent rise in consumer prices.

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

Last Updated: November 19, 2006 12:00 EST

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