Gold Falls Most Since July as Dollar Gains on China Rate Boost

Oct. 19 （Bloomberg） -- Gold futures fell the most since July as an unexpected interest-rate increase by China spurred gains for the dollar, curbing demand for bullion as an alternative investment.

The greenback jumped as much as 1.6 percent against a six- currency basket. Gold has rallied 22 percent this year, touching a record $1,388.10 an ounce on Oct. 14, as central banks around the world kept interest rates low to revive the global economy.

“China reminds the world that a central bank can in fact raise rates,” said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. “It strengthens the dollar and slows down expansion, and will give gold a decent correction.”

Gold futures for December delivery fell $36.10, or 2.6 percent, to settle at $1,336 an ounce at 1:44 p.m. on the Comex in New York. It was the biggest decline for a most-active contract since July 1.

China’s one-year deposit rate will rise to 2.5 percent from 2.25 percent, effective tomorrow. The lending rate will increase to 5.56 percent from 5.31 percent. This is the first increase for both rates since 2007.

“The Chinese have taken steps to rein in the spending and mitigate some of the inflation,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. “That’s going to hurt any asset that’s an inflation hedge. Gold is dropping heavy.”

Fed Policy

The Federal Reserve has kept its main lending rate between zero percent and 0.25 percent since December 2008. Fed Chairman Ben S. Bernanke said last week additional monetary easing may be warranted.

Investors have been placing record bets on gold. Open interest, or futures contracts yet to be closed, liquidated, or delivered, rose to 638,283 as of Oct. 14, according to data from Comex. On Oct. 7, daily trading in gold options reached a record 102,292 contracts.

Gold will average $1,400 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 futures for December delivery fell 63.3 cents, or 2.6 percent, to $23.78 an ounce. Futures reached $24.95 on Oct. 14, the highest level since March 1980.

Platinum futures for January delivery fell $20.70, or 1.2 percent, to $1,677.60 an ounce on the New York Mercantile Exchange. Palladium futures for December delivery fell $9.65, or 1.6 percent, to $578.45 an ounce.