Gold Tumbles on Rising Interest Rates, Declining Oil Prices

http://www.bloomberg.com/apps/news?pid=10000081&sid=aL53QWdF4EtI&refer=australia

June 8 (Bloomberg) -- Gold fell, extending a slump to almost four weeks, as rising interest rates and declining oil prices eroded the appeal of precious metals as an alternative investments and inflation hedge. Palladium tumbled to a 10-week low.

Gold has dropped 16 percent since reaching a 26-year high of $730.40 on May 12. Oil dropped today after the al-Qaeda leader in Iraq was killed, prompting speculation that disruptions of exports will ease. The European Central Bank and the Bank of Korea raised key lending rates, and U.S. Federal Reserve officials have indicated they may follow.

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``The whole world is raising interest rates,'' said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois. ``Why take the risk of investing in gold? Rising interest rates will push people away from speculative activity.''

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I had investigated buying gold as a hedge against market weakness. That was was based on the idea that gold rises when stock markets fall. Then I looked at the actual price histories and saw that the negative correlation has been greatly overstated. It's simpler to buy negative market funds as a hedge.