NEW YORK (MarketWatch) -- Gold futures fell Tuesday as the metal's appeal as a hedge against inflation declined after the U.S. reported a record drop in producer prices and inflation pressures in the U.K. eased much more than expected.
U.S. producer prices index fell a record 2.8% in October from a month ago, the most since 1947, the Labor Department reported Tuesday. The U.K.'s Office for National Statistics said consumer price index fell 0.2% in the same month. Market expectations had been an increase of 0.1%.
The data indicated that deflation is displacing inflation as a major concern for investors and policy makers, analysts said. "It now seems that there is a strong likelihood of deflation," said Ben Read, managing economist at the Center for Economic and Business Research.
Gold for December delivery fell $6.90, or 0.9%, to $735.10 an ounce on the Comex division of the New York Mercantile Exchange. It closed slightly lower in the previous session.
"Falling inflation would be a negative for gold prices," said James Moore, a precious metals analyst at TheBullionDesk.com. He also pointed out that gold is at risk of a dip lower before year-end.
As crude-oil prices slumped more than 60% from their record highs and as the credit crunch deepened, investors have been expecting inflation pressures to ease in the U.S. and other major economies. Wholesale gasoline prices in the U.S. plummeted 24.9% in October, also a record since 1947. See Economic Report.
"Inflation has very suddenly become yesterday's story and we mean across the planet," said David Rosenberg, North American economist at Merrill Lynch.
Dollar falls
Some analysts, however, said falling inflation worries in the U.S. will encourage the Federal Reserve to cut interest rates further, a move that could weaken the U.S. dollar and add upward pressures on gold prices.
"We believe that the fall in the PPI adds to the likelihood of further interest rate drops" and "add to the influences that will weaken the dollar soon," said Julian Phillips, editor of Gold Forecaster.
A weaker dollar tends to push up gold prices as it increases the metal's appeal as an alternative investment.
The dollar has been strengthening against the British pound and the euro since July, but recent trading has showed some weakness in the greenback. On Tuesday, the dollar index , which tracks the value of the greenback against its major rivals, fell 0.3%. See Currencies.
In gold exchanged-traded funds, gold in the SPDR Gold Trust, the largest gold exchange-traded fund, remained at 748.94 tons on Monday, unchanged for a fourth day, according to the latest data from the fund. Gold held by the fund hit a record high of 770.64 tons on Oct. 10.
The SPDR Gold Trust rose 0.3% to at $72.90.
In other trading, December copper fell 1.1% to $1.6385 a pound, while January platinum rose 0.5% to $825 an ounce. December silver rose 0.8% to $9.40 an ounce, and December palladium fell 1% to $215.50 an ounce.
On the equities side, the Amex Gold Bugs Index , which tracks the share prices of major gold companies, gained 3% to 186.51.
IShares Gold Trust lost 0.1% to $72.86, while the iShares Silver Trust ETF rose 1.9% to $9.35. The Market Vectors-Gold Miners ETF rose 1.4% to $19.93.
