Gold Falls on Signs Economy's Slump to Damp Commodity Demand

By Pham-Duy Nguyen

Nov. 5 (Bloomberg) -- Gold futures fell on speculation that the slumping U.S. economy will erode demand for commodities. Silver gained.

The Reuters/Jefferies CRB Index of 19 raw materials fell as much as 2.6 percent, led by tumbling energy costs. The gauge jumped 5.3 percent yesterday. Gold has dropped 11 percent this year as the CRB index declined 24 percent.

``Gold is moving with commodities,'' said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. ``Economic weakness doesn't look good for gold. There's still a push to go to cash and away from risk. All commodities are considered high risk.''

Gold futures for December delivery fell $14.90, or 2 percent, to $742.40 an ounce on the Comex division of the New York Mercantile Exchange. The price gained 4.2 percent yesterday.

The Institute for Supply Management's non-manufacturing index, which covers almost 90 percent of the U.S. economy, dropped to the lowest level on record in October, data showed today.

Declining equities also may reduce demand for gold, Lesh said. The Dow Jones Industrial Average fell as much as 3.5 percent after dropping 27 percent this year through yesterday.

``When you've got pressure on your equity positions, you don't feel like you've any money left for anything else,'' Lesh said. ``When people are out of money, they'll forgo the gold trade.''

As the economy deteriorates, demand for stocks and commodities may fall further and investors will seek the safety of cash, analysts said. The U.S. 10-year Treasury has returned 5.3 percent this year.

`Going Nowhere'

``Gold is going nowhere,'' said Ron Goodis, a futures- trading director at Equidex Brokerage Group in Closter, New Jersey. ``There doesn't seem to be any fresh money driving gold. The place to be now is bonds.''

Silver futures for December delivery rose 32.5 cents, or 3.2 percent, to $10.455 an ounce.

Signals from price charts indicate a sustained rally, analysts at Scotia Capital said yesterday in a report. The metal has trailed gold since the end of 2006. Yesterday, the price jumped almost 4 percent to $10.13 an ounce.

``With a close near $10.14, we are within striking distance of actually turning silver bullish,'' Scotia Capital said. ``If the market can take out the downtrend line, a potential target becomes $12.71.''

The metal is still down 30 percent this year.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

Last Updated: November 5, 2008 14:21 EST