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Gold prices decline after euro's rally against dollar stalls

Gold prices fell in New York, erasing an earlier gain, on speculation the value of the dollar will hold steady against the euro, eroding the precious metal's appeal as an alternative investment.

Gold generally moves in the opposite direction of the dollar, which fell against the euro on Wednesday. A government report yesterday showed prices paid to US producers jumped by the most since 1974, fueling speculation the Federal Reserve won't cut interest rates. „The Fed is not going to drop rates,” said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois. „The dollar will remain steady and gold will eventually come down.” Gold futures for February delivery dropped $1.10, or 0.2%, to $624.30 an ounce on the Comex division of the New York Mercantile Exchange, after earlier rising $2.50 to 627.90.

Prices gained 1.2% on Tuesday, the most this month. Gold is still up 20% this year, while the dollar has declined 10% against the euro. The Fed has kept interest rates unchanged at 5.25% since June, after two consecutive years of increases. The European Central Bank raised rates to 3.5% on December 7, the sixth increase in a year. Gold may not rebound until 2007 when investors and funds resume buying after from the holidays, analysts said. „Trading should be thin and choppy over the next two weeks but on balance directionless,” said William O'Neill, a partner at commodity-research company Logic Advisors in Upper Saddle River, New Jersey. He predicts gold will average $650 in 2007.

Gold is headed for a sixth straight annual gain. The metal moved in tandem with the euro from 2002 to 2004. Last year, gold gained 18% even as the dollar climbed 14% against the euro. „Our view is the dollar is going to weaken a little more and, all things being equal, that's going to be positive for gold,” said Paul Mcleod, vice president of precious metals at Commerzbank Securities in New York. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date. (Bloomberg)