GOLD, the metal that rallied during every US recession in the past three decades, may drop to a two-year low as the threat of deflation curbs bullion's appeal, Bloomberg news reported..

The number of gold futures held in New York plunged 48 per cent since its Jan 15 peak, according to data compiled by Bloomberg. Prices fell 17 per cent last month to US$724.55 (S$1,066.60) an ounce in London. Mr Joel Crane, a Deutsche Bank AG strategist in New York says it may drop to US$600 by year-end for the first time since 2006.

While gold rose since 2000 as the world economy expanded and the dollar weakened for five of the past six years, the Reuters/Jefferies CRB Index of 19 commodities lost 43 per cent since reaching its peak in July as the seizure in credit markets caused economies around the world to slow and the US to contract 0.3 per cent in the third quarter.

Rather than providing safety for investors, gold declined almost 31 per cent since reaching a record $1,033.90 an ounce in New York on Mar 17.

'Gold is not considered a safe haven because investors are viewing it as part of the commodity class,' Mr Crane said in an interview with Bloomberg. 'Commodity is a bad word right now. Through this whole credit crisis mess, cash has been king.'

Deutsche Bank expects gold, down 13 per cent this year in London, to average US$861 in 2008 and US$750 next year. UBS last week lowered its 2009 forecast to US$700 from US$825. Gold for immediate delivery averaged US$887.31 this year.

End of rally
Gold rose about 220 per cent this decade through June as expanding economies, especially in emerging markets, spurred demand for commodities and increased risks of inflation. While the CRB index rose more than 125 per cent during that period, the Standard & Poor's 500 Index fell 13 per cent and the US Dollar Index, which measures the currency against six of its biggest trading partners, weakened 29 per cent.

Demand for gold waned amid speculation that US government efforts to rescue the banking system and the Federal Reserve's decision to lower its target interest rate for overnight loans between banks to a 50-year low of 1 per cent will help the world's biggest economy recover faster than Europe. The combination of falling commodities and rising demand for dollar-based assets ended gold's bull market.

Gold buyers
That hasn't stopped some investors from pouring money into gold. The SPDR Gold Trust, the biggest exchange-traded fund for the metal, climbed to a record 770.6 tons on Oct 10. A one-ounce Krugerrand coin from South Africa cost almost US$29 an ounce more than the spot price of gold on Oct 27, compared with a less- than-US$5 premium at the start of the year.

Zuercher Kantonalbank, which manages about US$107 billion in Zurich, said Oct 15 that its gold vault was full after a surge in demand.

'The wonderful thing about gold is that you still have willing buyers,' said Mr Paul Sutherland, chief investment officer for Traverse City, Michigan-based Financial & Investment Management Group, which manages about US$540 million and has 5 per cent of its assets in the metal.

'One of the first things people will buy once they take their heads out of the foxhole is gold. It can take on a life of its own and go to US$1,000, US$2,000.'

Commodity flump
Gold in New York was the sixth-best performer in the CRB Index. Nickle fell 54 per cent and oil dropped 29 per cent. Only sugar and cocoa are up for the year.

'Gold's being treated like any other asset right now, it's deflating,' said Mr Ralph Preston, a futures analyst at Heritage West Futures in San Diego who had predicted a rally to US$1,150 by year-end.

While gold may drop as low as US$600 next year as investors raise cash to cover losses in other markets, a record US$1,500 an ounce is likely in three years as central banks spend more than US$1 trillion to end the credit crunch, setting the stage for faster inflation, said Mr Peter Tse, head of precious metals trading at ScotiaMocatta in Hong Kong.

Revised forecasts
Mr Mario Innecco of MF Global UK, who in March expected gold at US$1,200 by year-end, said the range now is US$850 to US$950. 'All the Western central banks have guaranteed the banking system,' Mr Innecco said from London. 'The cost is going to be higher inflation and paper currencies will be worth less.'

In past recessions, investors found value in gold. The metal gained 78 per cent from November 1973 to March 1975; 20 per cent from January to July 1980; 2.3 per cent from July 1981 to November 1982; 1 per cent from July 1990 to March 1991; and 2.7 per cent from March to November 2001.

For now, investors prefer paper.

'Under deflation, cash and highest-quality bonds are the asset class of choice,' said Mr Marc Faber, publisher of the Gloom, Boom & Doom Report.

Deflationary recession
Gold rallied 31 per cent last year as the US inflation rate reached 4.1 per cent, the most since 1990. Toronto-based Barrick Gold, the world's largest producer, fell 29 per cent on the Toronto Stock Exchange in October, the worst month in 21 years. Phoenix-based Freeport-McMoRan Copper & Gold plummeted 49 per cent.

'We haven't had a deflationary recession since the 1930s,' said Mr Leonard Kaplan, president of Prospector Asset Management in Illinois. 'Equities will fall, consumers will spend less, and demand for commodities will just keep going lower.'