Gold declined in New York as the dollar strengthened after China unexpectedly raised lending rates, curbing demand for bullion as an alternative investment. The U.S. Dollar Index, a six-currency gauge of the greenback’s strength, extended gains after China’s central bank raised lending and deposit rates for the first time since 2007. Gold usually moves inversely to the U.S. currency, and some investors buy the metal as an alternative to low rates. “In reaction to the People’s Bank of China interest-rate hike, the dollar is appreciating,” said Bayram Dincer, an analyst at LGT Capital Management in Switzerland. “This lowers gold prices. Higher global rates are bad for gold.” Gold futures for December delivery lost as much as $19.40, or 1.4 percent, to $1,352.70 an ounce and traded at $1,355.20 at 8:12 a.m. on the Comex in New York. The metal reached a record $1,388.10 on Oct. 14. Bullion for immediate delivery in London was 0.9 percent lower at $1,355.90. Spot prices reached an all- time high $1,387.35 on Oct. 14. The one-year deposit rate will increase to 2.5 percent from 2.25 percent, effective tomorrow, the PBOC said on its website today. The lending rate will increase to 5.56 percent from 5.31 percent, it said. Fed Policy Countries can’t devalue currencies to achieve economic growth, and the U.S. will preserve confidence in a strong dollar, U.S. Treasury Secretary Timothy F. Geithner said yesterday. The greenback slid to an eight-month low against the euro last week after Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted. A steadying dollar is “negative for gold,” Peter Fertig, owner of Quantitative Commodity Research Ltd. in Hainburg, Germany, said today by phone. Still, “there are a lot of worries” and data showing a slowing recovery “could make another point for quantitative easing,” he said. Gold will average $1,400 an ounce next year, up from a previous forecast of $1,295, UBS AG analysts including Edel Tully said in a report dated yesterday. Concerns about currency weakness and the likelihood of quantitative easing, or asset purchases by the Fed, will support prices, the bank said. “We are constructive on gold until monetary policy begins to tighten,” the UBS analysts said. “Gold’s largest hurdle will arrive perhaps not when the U.S. initially tightens, but will certainly intensify as interest rates move north. Then the opportunity cost of holding gold will eat into its appeal.” Silver for December delivery in New York dropped 1.9 percent to $23.95 an ounce. Futures reached $24.95 on Oct. 14, the highest level since March 1980. Platinum for January delivery declined 1.1 percent to $1,679 an ounce. Palladium for December delivery fell 1.9 percent to $576.80 an ounce. The metal reached $606.25 on Oct. 7, the highest price since June 2001. To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net. To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.

Source