Jan. 26 (Bloomberg) -- Gold declined in London and New York as a rally in the dollar eroded the appeal of the precious metal as an alternative investment.

The U.S. currency rose against the euro after a government report signaled strength in the economy, fueling speculation the Federal Reserve will keep raising interest rates. Holding gold, which reached a 25-year high this week, is less attractive as rates rise because the metal has no fixed returns, unlike bonds.

``The euro was a little weaker today, so that took gold a little lower,'' said Billy Flahive, a trader at Island Trading Group in New York.

Gold futures for February delivery dropped $2.60, or 0.5 percent, to $559.00 an ounce on the Comex division of the New York Mercantile Exchange. Gold reached $568.50 on Jan. 20, the highest since 1981. A futures contract is an obligation to sell or buy a commodity at a set price by a specific date.

Gold has traditionally moved in tandem with the euro. That relationship changed last year when gold gained in all major currencies, paced by a 36 percent gain in yen and euros. The dollar rose 14 percent against the euro last year.

Orders at U.S. factories for durable goods last month increased 1.3 percent, after a revised 5.4 percent advance in November, the Commerce Department said. Economists expected a 1 percent December gain, based on the median of 68 forecast in a Bloomberg survey.

A more robust outlook for the U.S. economy may provide an excuse for some investors to lock in gold's gains and invest in stocks, analysts said.

Investment Demand

Investment demand drove gold prices up 18 percent last year as funds diversified out of stocks and bonds. The Standard & Poor's 500 Index rose 3 percent last year while the benchmark 10-year U.S. Treasury returned 2 percent.

Analysts who look at technical charts say gold has traded in a range this week as prices attempt to surpass the 25-year high of $568.50.

``This is three steps forward, one step back,'' said John Meyer, a London-based analyst at Numis Securities Ltd.

Spot gold yesterday rose to within 0.3 percent of the 25- year high of $568.10 an ounce reached Jan. 20. Gold for immediate delivery fell $3.25 or 0.6 percent to $560.15 in London.

``We had a 25-year high settlement price and that encouraged some profit-taking,'' Flahive at Island Trading said.

The metal will average $515 an ounce this year, 3 percent more than previously forecast, as gold miners fail to expand production fast enough to meet growing demand, Numis said in a report yesterday. Prices averaged $445 last year.

Gold's Rally

Gold prices have gained for five consecutive years. Gold Fields Ltd., the world's No. 4 gold producer, today said fiscal second-quarter profit rose more than sixfold. Shares of the Johannesburg-based company rose to their highest since 2002.

Gold Fields Chief Executive Officer Ian Cockerill said he expects gold prices to extend last year's gains.

``The fundamentals are still strong,'' he said.

Platinum, reaching a record $1,062.50 an ounce during Asian hours today, traded $3 lower, or 0.3 percent, at $1,054.50 in London.

Citigroup Inc., the largest U.S. bank, raised its 2006 estimate for platinum 14 percent to $1,013 an ounce on expectations that investment funds will increase their holdings of the metal because of a supply shortfall. The estimate for 2007 was raised 19 percent to $975, the bank said in a report dated yesterday.

Platinum Demand

Platinum, which is used in jewelry and in devices to clean car exhaust, has gained for four consecutive years, including an increase of 13 percent last year. Demand has exceeded supply for seven consecutive years, according to Johnson Matthey Plc, the world's biggest platinum-group metals distributor.

Citigroup also raised estimates for palladium prices, expecting a supply shortfall for a second consecutive year. The palladium estimate for this year was raised 53 percent to $315 an ounce, and by 20 percent to $425 for 2007.

Palladium for immediate delivery fell $7.50, or 2.7 percent, to $273.50 an ounce. Silver for immediate delivery rose 7 cents, or 0.7 percent, to $9.565 an ounce, after reaching $9.63, the highest since 1984.

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

Last Updated: January 26, 2006 14:56 EST