Sept. 8 (Bloomberg) -- Gold in New York fell to a two-month low on speculation demand from investors and jewelers won't recover in the fourth quarter. Palladium plunged more than 6 percent and silver tumbled for a second straight day.

Merrill Lynch & Co. yesterday said gold will average $625 an ounce this year, down 3.8 percent from a June 9 forecast of $650. Jewelers, the biggest buyers, slashed purchases in the first half, according to the producer-funded World Gold Council. Gold, which reached a 26-year high in mid-May, fell 2.4 percent this week.

``At this stage, we've got to start looking for support down at $600,'' said Michael Guido, director of hedge fund marketing at Societe Generale in New York. ``A lot of confidence has been stripped out of the market.''

Gold futures for December delivery fell $7.60, or 1.2 percent, to $617.30 an ounce on the Comex division of the New York Mercantile Exchange, the lowest since July 3.

Palladium for December delivery tumbled $21.90, or 6.2 percent, to $333.60 an ounce, the biggest daily percentage drop since June 13. The decline also represented the largest fluctuation of any commodity today.

Silver for December dropped 40 cents, or 3.2 percent, to $12.295 an ounce. Prices slid 3.8 percent yesterday.

``We're seeing a far less aggressive approach to investing in commodities,'' said William O'Neill, a partner at the commodity research firm Logic Advisors LLC in Upper Saddle River, New Jersey. ``The funds are taking a two-sided, selective trading approach instead of a `buy everything' mentality.''

A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

Jewelers

Investment demand helped drive gold futures to $732 an ounce on May 12, the highest since January 1980. Higher prices deterred jewelers, who accounted for 73 percent of purchases last year. Gold demand fell 16 percent in the second quarter, the third straight decline.

Jewelry demand has helped gold gain every September since 2000 as manufacturers stock up for holiday shoppers. Investors had expected the trend to continue after the metal gained 2.3 percent on Sept. 5, even as energy prices fell and the dollar gained, Guido said.

``This move was a head fake,'' Guido said. ``You had a lot of money coming into the market. The sharp reversal caught a lot of people off guard.''

A pick-up in jewelry demand is crucial to sending gold to a sixth straight annual gain, some analysts said. Merrill Lynch reduced its forecast amid expectations of a drop in jewelry demand.

`Without Genuine Demand'

``Gold is without genuine consumer demand,'' said Philip Klapwijk, executive chairman of GFMS Ltd., a London-based metals research firm.

Oil futures touched a five-month low today, and the dollar reached a six-week high against the euro. Gold has generally moved in tandem with oil and the euro.

``Given the collapse in energy prices, the seemingly lessened threat from Iran regarding its nuclear power programs, and U.S. dollar strength, gold has collapsed,'' said Dennis Gartman, gold trader, economist and editor of the Gartman Letter in Suffolk, Virginia.

Gold yesterday fell below the 100-day moving average, signaling the metal may drop further, traders who follow historical price charts said.

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

Last Updated: September 8, 2006 14:30 EDT