Nov. 6 (Bloomberg) -- Gold rose to a record, Treasuries gained and the dollar fell after U.S. unemployment reached a 26- year high, reinforcing speculation the Federal Reserve will keep interest rates near zero into next year.

The Standard & Poor’s 500 Index gained 0.3 percent after an initial drop following the Labor Department saying the unemployment rate last month jumped to 10.2 percent, the highest level since 1983. Gold touched $1,101.90 an ounce, surpassing an all-time high for the third time this week. Oil fell for a second day on concern the jobless rate will hurt energy demand.

“The job market will have to stabilize and maybe get better before we see the Fed doing anything,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “This is going to be a slow grind in terms of recovery.”

The S&P 500 rose to 1,069.30 at 4:01 p.m. in New York. The Dow Jones Industrial Average added 17.46 points, 0.2 percent, to 10,023.42. Both benchmarks rallied 3.2 percent this week.

Employers eliminated 190,000 jobs in October after a reduction of 219,000 in the previous month, the government reported. The median estimate of 84 economists in a Bloomberg survey was for a reduction of 175,000. The jobless rate rose from 9.9 percent.

GE, Macy’s, AIG

“Even with unemployment coming in at 10.2 percent, people are still saying the worst is behind us at this point and that we could see improvement in the next few months,” said Jason Cooper, who oversees about $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. “We’re still on the path to recovery.”

General Electric Co. gained the most in the Dow, surging 6.2 percent to $15.33 as analysts said risks to its finance unit have diminished.

Macy’s Inc. rallied 6.5 percent to $19.18, leading a measure of retailers 1.7 percent higher, after JPMorgan Chase & Co. said the second-biggest U.S. department store chain probably beat analysts’ third-quarter profit estimates and raised its rating to “overweight” from “neutral.”

American International Group Inc. tumbled 9.7 percent to $35.48. The insurer bailed out by the U.S. government posted sales declines at its property-casualty and life insurance divisions.

Gold for December delivery rose for the fifth day, climbing $6.40, or 0.6 percent, to $1,095.70 on the Comex division of the New York Mercantile Exchange. The price has gained 5.3 percent this week after setting records on Nov. 3 and 4.

‘Exploding the Deficit’

“Until Washington stops exploding the deficit, the dollar will continue to weaken, and gold is going higher,” said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago.

The U.S. currency initially advanced as much as 0.4 percent versus the euro on reduced demand for riskier assets after the employment report. The greenback erased its gain about an hour later on speculation the Fed will trail other central banks in raising borrowing costs.

The employment report “adds to the uncertainty of the recovery, but it also reinforces how much longer we are going to need lower rates,” said David Tien, a money manager at Fischer Francis Trees & Watts in New York, with $19 billion in assets. “It solidifies the outlook for plentiful liquidity going into the middle of next year.”

Rate Bets Decrease

Traders reduced bets that the Fed will increase borrowing costs in the first half of next year. Fed funds futures showed a 52 percent chance that policy makers would raise their benchmark by at least a quarter-percentage point by the June meeting. A week ago the likelihood was 63 percent.

The dollar decreased 0.9 percent to 89.88 yen from 90.71 yesterday. It fetched $1.4847 per euro, compared to $1.4871 and lost 0.9 percent this week.

Treasury two-year note yields touched 0.8321 percent, the lowest since May 21, as the record joblessness coupled with the Fed’s statement on Nov. 4 maintaining it will leave rates low for an extended period spurred demand for government debt.

Two-year notes rose for a second week as the 1 percent security maturing in October 2011 today rose 2/32, or 63 cents per $1,000 face amount, to 100 9/32. Ten-year note yields fell two basis points to 3.50 percent and rose 11 basis points for the week.

Crude oil for December delivery fell $2.24, or 2.8 percent, to $77.38 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. The commodity earlier fell as much as 3.7 percent.

“The unemployment report raises fears that there will be a double dip to the recession,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “This doesn’t bode well for consumption of commodities such as oil.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

Last Updated: November 6, 2009 17:22 EST