Gold, Silver Fall as Higher Interest Rates Pare Metal Demand

June 7 (Bloomberg) -- Gold and silver fell the most in at least two weeks in New York on speculation that higher global interest rates will reduce demand for precious metals as alternative investments.

Bond yields climbed around the world after the Reserve Bank of New Zealand unexpectedly raised rates today. The European Central Bank yesterday raised a benchmark rate to the highest in six years. Holding gold becomes less attractive when rates rise because the metal has no fixed returns.

``As interest rates go higher and higher, it makes the purchase of any commodities, which never pay interest or have yield, a poor judgment,'' said Leonard Kaplan, president of Prospector Asset Management, a money-management company in Evanston, Illinois.

Gold futures for August delivery fell $9.40, or 1.4 percent, to $665.20 an ounce on the Comex division of the New York Mercantile Exchange, the biggest decline for a most-active contract since May 24. The price is still up 4.3 percent this year.

Silver for July delivery fell 23.7 cents, or 1.7 percent, to $13.48 an ounce on the Comex, the biggest drop since May 16. In 2006, silver gained 46 percent, while gold climbed 23 percent.

Gains were limited by speculation that Newcrest Mining Ltd., Australia's largest gold miner, will buy gold to close its forward sales contracts.

Exit Hedges

Newcrest is ``looking'' at closing its gold hedge book, Chief Executive Officer Ian Smith said today.

Most producers increased forward sales when gold touched a 20-year low in 1999 to hedge against further declines in the price. Mining companies have been unwinding those contracts to take advantage of prices that have more than doubled over the past five years.

Closing the hedge book ``provides buying pressure'' in the gold market, Kaplan said.

Newcrest has about 700,000 ounces of gold, or 38 percent of annual production, hedged each year for the next 5 1/2 years, Smith said.

Gold earlier climbed as high as $678 today on speculation rising energy costs will boost the precious metal as a hedge against inflation.

Some investors buy gold to preserve purchasing power in times of accelerating inflation. Gold futures surged to a record $873 in 1980, when a jump in the cost of oil led to a 13 percent annual rise in U.S. consumer prices.

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

To contact the reporter on this story: Choy Leng Yeong in Seattle at clyeong@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.