Sept. 6 (Bloomberg) -- Gold in New York closed above $700 an ounce for the first time since May 2006 on speculation further declines in the dollar will boost the appeal of precious metals as alternative investments. Silver also gained.

Five of the past six bear markets for the U.S. currency pushed the price of gold higher. Investment in the StreetTracks Gold Trust, an exchange-traded fund backed by bullion, reached a record 528 tons yesterday. The metal has climbed 10 percent this year, and the dollar has fallen 3.6 percent against the euro.

``The primary catalyst for the next leg up in gold is the dollar,'' said Matt Zeman, a trader at LaSalle Futures Group in Chicago. ``In light of a potential interest-rate cut, people are expecting the dollar to head lower, and that's a reason to buy gold.''

Gold futures for December delivery rose $13.90, or 2 percent, to $704.60 an ounce on the Comex division of the New York Mercantile Exchange, the highest closing price since May 12, 2006.

Silver futures for December delivery rose 17.8 cents, or 1.4 percent, to $12.533 an ounce. The metal is still down 3.1 percent this year.

``Good fund buying this week has sparked a strong price move,'' said Paul McLeod, vice president of the precious-metals department at Commerzbank Securities in New York. ``Expectations of lower rates are benefiting gold.''

Bets on Fed

The dollar fell for a second straight day on speculation the Federal Reserve will cut borrowing costs this year. The Fed has kept its benchmark rate at 5.25 percent since June 2006, helping to push the euro to a record high of $1.3852 on July 24. The 13-nation currency traded as high as $1.371 today.

Interest-rate futures show traders see 45 percent odds the Fed will cut its overnight lending rates to 4.5 percent by Dec. 11, compared with a 10 percent chance a month ago.

``Any cut in rates helps the metals because it's just less competition'' from rival assets, said Marty McNeill, a trader at R.F. Lafferty Inc. in New York.

Holding gold becomes less attractive when rates rise because the metal has no fixed returns, unlike bonds.

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

Last Updated: September 6, 2007 14:15 EDT