Gold Falls Most in Two Months as Dollar Jumps

Gold tumbled the most in two months as the dollar had the biggest gain since December, reducing the appeal of the precious metal as an alternative investment. Silver also dropped.

The dollar index, a weighted measure against the euro, yen, pound and three other major currencies, jumped 1.1 percent. Federal Reserve Chairman Ben S. Bernanke said risks to the economy have faded, spurring speculation that interest rates will rise. Before today, gold climbed 38 percent in the past year as the dollar fell 15 percent against the euro.

Gold futures for August delivery tumbled $26.90, or 3 percent, to $871.20 an ounce on the Comex division of the New York Mercantile Exchange. The percentage drop was the biggest since April 1.

Silver futures for July delivery fell 57.5 cents, or 3.3 percent, to $16.635 an ounce. The price has advanced 11 percent this year, while gold climbed 4 percent.

Gold rallied 39 percent from Sept. 17 to March 17, reaching a record $1,033.90, as the Fed slashed borrowing costs after a housing slump and a credit squeeze threatened to push the U.S. economy into a recession.

The benchmark federal-funds rate is at 2 percent, down from 5.25 percent in mid-September after seven reductions.

Still, demand for gold as a hedge against inflation may climb as energy costs gain, some analysts said.

Gold moved in tandem with crude oil 92 percent of the time in 2007. Since reaching the record on March 17, gold has fallen 16 percent, while crude oil has gained 24 percent., Bloomberg
6/10/2008 7:33:33 PM