Gold Drops Most in Two Months as Dollar Gain Curbs Hedge Demand

By Nicholas Larkin and Halia Pavliva

June 12 (Bloomberg) -- Gold slid the most in two months as the rallying dollar reduced demand for the metal as an alternative investment. Silver also slumped.

The U.S. Dollar Index, a six-currency gauge of the greenback’s value, rose as much as 1.4 percent after Japanese Finance Minister Kaoru Yosano said his nation’s confidence in U.S. debt is “unshakable.” In a June 10 interview, Yosano also said the dollar’s status as the world’s reserve currency isn’t threatened. Gold typically moves inversely to the U.S. currency.

The dollar’s rise “put a little bit of pressure on gold,” Bernard Sin, the head of currency and metals trading at Swiss refiner MKS Finance SA, said by telephone from Geneva. “The dollar may rebound in the short term, but longer term, it’s going to continue to weaken.”

Gold futures for August delivery tumbled $21.30, or 2.2 percent, to $940.70 an ounce on the New York Mercantile Exchange’s Comex division. The decline was the sharpest since April 6 and left the metal down 2.3 percent for the week, the second-consecutive weekly drop. Gold still has gained 6.4 percent this year in New York.

In London, bullion for immediate delivery dropped $14.61, or 1.5 percent, to $939.33 an ounce at 8:49 p.m. local time.

Some investors buy gold as a store of value in times of heightened international tensions and sell the metal when those tensions ease.

Iranian Presidential Vote

In Iran, voters went to polls today as President Mahmoud Ahmadinejad, 52, sought a second term, touting accomplishments including advancing the country’s nuclear and aerospace technologies. Those steps have raised concerns in the West that Iran is developing atomic weapons and long-range missiles capable of reaching Israel and parts of Europe, which may have made Ahmadinejad vulnerable to a more moderate challenger.

“Pressure may also be coming from early news that a moderate candidate” may win, Tom Pawlicki, an MF Global analyst in Chicago, said by e-mail. “Such news would be bearish for gold.”

Voting was extended to 10 p.m. local time, four hours later than usual, as an “unprecedented” number sought to cast their ballots, according to Kamran Daneshjou, head of Iran’s election commission. Initial vote counts may be released early tomorrow and conclusive results may be known by later in the day.

Gold slipped to $937.25 in the afternoon “fixing” in London, used by some mining companies to sell their output, from $950 in the morning fixing. Spot prices are headed for a second straight weekly decline in London.

Resistance Seen

“It’s getting increasingly tough to hold onto its gains beyond $965-$966 levels,” Pradeep Unni, an analyst at Richcomm Global Services in Dubai, said in a note. “Repeated failures to break and hold above this zone has triggered selloffs.”

Bullion may average $825 an ounce next year, down from a previous forecast of $950, BNP Paribas said yesterday in a report. The bank raised its 2009 projection to $925, from $900.

“We believe that deflation rather than inflation is the biggest risk facing the global economy in the coming months,” Anne-Laure Tremblay, a London-based Paribas analyst, said in the report. Still, “safe-haven demand should remain strong throughout this period, as the road to recovery should be long and bumpy.”

‘Positive’ Outlook

“The outlook is still generally positive, as we must not lose sight of the forest through the trees,” MF Global’s Pawlicki said. “Commodity investment is still relatively strong and the outlook for the dollar isn’t favorable.”

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was unchanged for a fourth session at 1,132.15 metric tons as of yesterday, the company said on its Web site.