Nov. 3 (Bloomberg) -- Gold, the metal that rallied during every U.S. recession in the past three decades, may drop to a two-year low as the threat of deflation curbs bullion's appeal.

The number of gold futures held in New York plunged 48 percent since its Jan. 15 peak, according to data compiled by Bloomberg. Prices fell 17 percent last month to $724.55 an ounce in London. The metal may drop to $600 by yearend for the first time since 2006, said Joel Crane, a Deutsche Bank AG strategist in New York.

While gold rose since 2000 as the world economy expanded and the dollar weakened for five of the past six years, the Reuters/Jefferies CRB Index of 19 commodities lost 43 percent since reaching its peak in July as the seizure in credit markets caused economies around the world to slow and the U.S. to contract 0.3 percent in the third quarter. Rather than providing safety for investors, gold declined almost 31 percent since reaching a record $1,033.90 an ounce in New York on March 17.

``Gold is not considered a safe haven because investors are viewing it as part of the commodity class,'' Crane said in an interview. ``Commodity is a bad word right now. Through this whole credit crisis mess, cash has been king.''

Deutsche Bank expects gold, down 13 percent this year, to average $861 in 2008 and $750 next year. UBS AG last week lowered its 2009 forecast to $700 from $825. Gold for immediate delivery has averaged $886.57 this year.

End of Rally

Gold rose about 220 percent this decade through June as expanding economies, especially in emerging markets, spurred demand for commodities and increased risks of inflation. While the CRB index rose more than 125 percent during that period, the Standard & Poor's 500 Index fell 13 percent and the U.S. Dollar Index, which measures the currency against six of its biggest trading partners, weakened 29 percent.

Demand for gold waned amid speculation that U.S. government efforts to rescue the banking system and the Federal Reserve's decision to lower its target interest rate for overnight loans between banks to a 50-year low of 1 percent will help the world's biggest economy recover faster than Europe. The combination of falling commodities and rising demand for dollar- based assets ended gold's bull market.

Dennis Gartman, an economist and editor of the Suffolk, Virginia-based Gartman Letter, exited all his gold positions, except for coins he purchased at the end of September. ``I feared the whole financial system was coming to a halt, and you need a little gold in that case,'' he said. ``I doubt it will anymore. But it sure felt like it a month ago. There's no value in gold now.''

Gold Buyers

That hasn't stopped some investors from pouring money into gold. The SPDR Gold Trust, the biggest exchange-traded fund for the metal, climbed to a record 770.6 tons on Oct. 10. A one- ounce Krugerrand coin from South Africa cost almost $29 an ounce more than the spot price of gold Oct. 27, compared with a less- than-$5 premium at the start of the year.

Zuercher Kantonalbank, which manages about $107 billion in Zurich, said Oct. 15 that its gold vault was full after a surge in demand.

``The wonderful thing about gold is that you still have willing buyers,'' said Paul Sutherland, the chief investment officer at Traverse City, Michigan-based Financial & Investment Management Group, which manages about $540 million and has 5 percent of its assets in the metal. ``One of the first things people will buy once they take their heads out of the foxhole is gold. It can take on a life of its own and go to $1,000, $2,000.''

Commodity Slump

This year, gold in New York was the seventh-best performer in the CRB Index. Nickel fell 55 percent and oil dropped 33 percent. Only sugar is up.

``Gold's being treated like any other asset, it's deflating,'' said Ralph Preston, a futures analyst at Heritage West Futures in San Diego who had predicted a rally to $1,150 by yearend. ``I'm exercising patience and looking over a longer time horizon for gold to regain, in the eyes of the market, its status as a safe haven.''

While gold may drop as low as $600 next year as investors raise cash to cover losses in other markets, a record $1,500 is likely in three years as central banks spend more than $1 trillion to end the credit crunch, setting the stage for faster inflation, said Peter Tse, head of precious metals trading at ScotiaMocatta in Hong Kong.

Gold for immediate delivery fell $1.10, or 0.3 percent, to $723.45 at 4:59 p.m. New York time.

Revised Forecasts

Mario Innecco of MF Global U.K., who in March expected gold at $1,200 by yearend, said the range now is $850 to $950. ``All the Western central banks have guaranteed the banking system,'' Innecco said from London. ``The cost is going to be higher inflation and paper currencies will be worth less.''

In past recessions, investors found value in gold. The metal gained 78 percent from November 1973 to March 1975; 20 percent from January to July 1980; 2.3 percent from July 1981 to November 1982; 1 percent from July 1990 to March 1991; and 2.7 percent from March to November 2001.

For now, investors prefer paper. Foreign accounts, including central banks, raised their holdings of Treasuries to $1.6 trillion in the week ended Oct. 29, up from $1.5 trillion at the start of the month, Federal Reserve data show. U.S. debt returned 4.6 percent in 2008 and the dollar is up 15 percent against the euro, heading for the biggest annual jump since the European currency's debut in 1999.

``Under deflation, cash and highest-quality bonds are the asset class of choice,'' said Marc Faber, publisher of the ``Gloom, Boom & Doom Report.''

Deflationary Recession

Gold rallied 31 percent last year as the U.S. inflation rate reached 4.1 percent, the most since 1990. The threat of accelerating prices moderated as commodities from oil to corn to rice plunged from records in the past four months. The Labor Department's consumer price index was unchanged in September after a 0.1 percent drop in August.

Commodity producers are among this year's worst-performing U.S. stocks. The Philadelphia Stock Exchange Gold & Silver Index of 16 mining companies plunged to a five-year low on Oct. 24.

Toronto-based Barrick Gold Corp., the world's largest producer, fell 29 percent on the Toronto Stock Exchange in October, the worst month in 21 years. Phoenix-based Freeport- McMoRan Copper & Gold Inc. plummeted 49 percent.

``We haven't had a deflationary recession since the 1930s,'' said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. ``Equities will fall, consumers will spend less, and demand for commodities will just keep going lower.''

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

Last Updated: November 3, 2008 17:16 EST