Gold Gains on Outlook for U.S. Interest Rates; Silver Declines

Gold rose, extending gains to a 27- year high, on speculation a slowing economy may force the Federal Reserve to cut interest rates further, boosting the appeal of the metal as an alternative investment to U.S. assets. Silver fell.

Gold has rallied 4.2 percent since the Fed lowered its benchmark rate by 0.5 percentage point to 4.75 percent on Sept. 18, the first cut in four years. The dollar fell to a record against the euro for the eighth straight session before rebounding. The metal is up 18 percent this year.

``There's potential for inflation out there because the Fed will have to lower rates to stoke the economy,'' said Ron Goodis, futures trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Gold is being bought because people are still thinking the dollar is going lower,''

Gold futures for December delivery rose $4.10, or 0.5 percent, to $754.10 an ounce on the Comex division of the New York Mercantile Exchange. The metal earlier climbed to $755.70, the highest for a most-active contract since Jan. 22, 1980, the day after the price reached a record $873.

Economic Slowdown

The economy will grow 2 percent this year, the least since 2002, according to a Bloomberg survey of economists taken the first week of September. Economists had projected a 2.5 percent expansion at the start of the year.

Housing construction fell 12 percent in the second quarter, a sixth quarter of declines, the government reported last week.

``The Fed seems to be far more concerned at this point with keeping the economy going and avoiding a recession than fighting any elevated inflationary pressures,'' said Matt Zeman, a metals trader at LaSalle Futures Inc. in Chicago. ``All of these factors point to a weaker dollar and stronger gold prices.''

Still, historical charts show gold is poised for a decline. The 14-day relative strength index reached 81 today and has been above 70 since Sept. 6. The RSI for the euro has been above 70 since Sept. 20. A reading above 70 signals the price is headed lower.

``If the dollar quits making lows, that would set gold up for some selling,'' said Frank Lesh, a trader at FuturePath Trading LLC in Chicago.

Silver futures for December delivery dropped 6.5 cents, or 0.5 percent, to $13.855 an ounce. The metal, which has wider industrial applications, has trailed gold this year, gaining 7.1 percent. Last year, silver rose 46 percent and gold gained 23 percent.