Bloomberg News

Gold May Fall as Stronger Dollar, China Rate Rise Curb Demand

July 06, 2011

July 6 (Bloomberg) -- Gold may decline in New York as a stronger dollar and higher interest rates in China curb demand for an alternative investment.

China said it will raise interest rates from tomorrow for the third time this year after inflation accelerated to the fastest pace since July 2008. The dollar gained against the euro after Moody’s Investors Service cut Portugal’s credit rating to junk status, stoking speculation the nation will need a second bailout. Gold typically moves counter to the greenback.

There is “bearish pressure from potentially higher interest rates,” which increase the opportunity cost of holding bullion, said Filip Petersson, an analyst at SEB AB in Stockholm. “It all comes down to the real interest rate, will it rise or fall? Dollar strength is normally bearish for gold prices.”

Gold for August delivery fell $1, or 0.1 percent, to $1,511.70 an ounce by 8:01 a.m. on the Comex in New York. Immediate-delivery gold was 0.3 percent lower at $1,511.15 in London.

Gold is up 6.4 percent in 2011 after climbing the past 10 years, the longest run of gains in at least nine decades in London. Europe’s debt crisis helped bullion futures reach a record $1,577.40 on May 2.

Moody’s Investors Service yesterday slashed Portugal’s rating four levels to Ba2 with a negative outlook. The decision came two months after Portugal got a 78 billion euro aid package ($112 billion). The cut may further strain relations between the rating companies and European Union policy makers, who are trying to ensure their plan for investor involvement in a new Greek bailout doesn’t trigger a default.

Budget Reduction

The Obama administration and congressional leaders are working to complete a deal on a long-term budget reduction package by July 22. President Barack Obama said he opposes a deficit-cutting measure that would only allow for a short-term increase in the U.S. debt limit as he called a meeting tomorrow with lawmakers to work toward fixes in the government’s finances.

The president’s comments yesterday were the second time in less than a week that he has come to the podium to publicly push lawmakers to secure a deal that addresses basic solutions to deficit spending while averting a first-ever U.S. default on its obligations.

“Portugal’s four-notch ratings downgrade is a reminder that Europe’s debt problems are far from solved,” Edel Tully, a London-based analyst at UBS AG, said in a report. “The focus is increasingly on the U.S. debt ceiling debate. An increasing focus on U.S. fiscal worries should also lead to safe-haven and diversification bids.”

Silver for September delivery fell 0.6 percent to $35.19 an ounce in New York. Palladium for September delivery slipped 0.8 percent to $769.65 an ounce. Platinum for October delivery was down 0.4 percent at $1,735.80 an ounce.

--Editors: John Deane, Nicholas Larkin

To contact the reporter for this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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