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Metals
Falling Dollar Props Up Gold
By Simon Constable
TheStreet.com Staff Reporter
1/17/2007 3:53 PM EST
URL: http://www.thestreet.com/markets/metals/10332967.html

Updated from 12:10 p.m. EST


Gold prices edged higher Wednesday as the dollar declined against other major currencies.

Prices for bullion to be delivered in February added $7.40 close at $633.30 an ounce on the Comex division of the Nymex.

The exchange-traded funds that hold inventories of gold bars also were moving ahead. iShares Comex Gold Trust (IAU) was up 0.8%, while streetTracks Gold Shares (GLD) was higher by 1.1% in recent action.

Surprisingly strong producer price index data for December combined with higher-than-expected industrial production in the same month helped the dollar pare some of its losses, but it still remained underwater compared with a day earlier.

Dollars were recently changing hands for 120.61 yen, down slightly from 120.63 yen late Tuesday. The euro was trading at $1.293, up from $1.291 previously. Prices for gold tend to move in the opposite direction to that of the greenback.

"The more economic data we get the clearer it is that the [Federal Reserve] won't be making [interest rate] cuts any time soon," says Michael Darda, chief economist at MKM Partners in Greenwich, Conn.

Short-term traders often choose currencies based on the relative returns from investing in government securities. Hence, the prospect of the Fed not reducing rates would have a buoying effect on the greenback, because yields on U.S. Treasuries won't be expected to come down.

But longer term, other factors can have hefty influences on currency. For instance, new data show that U.S. investors purchased record levels of foreign stocks and bonds last November.

"These flows should help cap gains in the U.S. dollar in the long term as they reflect increased U.S. interest in foreign assets," says Ashraf Laidi, chief foreign exchange analyst at CMC Markets in New York. "It's mainly a long-term effect."

And it may have been that focus on the lack of future dollar strength on which traders focused, sending gold higher.

Having something of a dampening effect on upward gold price moves were talks in Berlin between the U.S. and North Korea regarding the communist country's nuclear arms program, Reuters reports. Gold is often purchased by investors seeking a safe-harbor asset during times of political upheaval, and reduced tensions typically dull the glow of gold.

Turning to the mining patch, Newmont Mining (NEM) was moving 0.7% higher, while shares of Canada's Barrick Gold (ABX) were 0.4% higher. The Amex Gold Bugs Index was rallying 0.8%.

In base metals, copper was slipping on the Comex, with March-dated contracts closing a penny lower at $2.57 a pound.

Elsewhere, BMO Capital Markets upped its rating on diversified mining giant BHP (BHP) to outperform from market-perform and increased the target share price to $48 a share from $46. The shares were recently losing 0.1% at around $39.

BMO also trimmed its price target on Freeport McMoRan Copper & Gold (FCX) to $72 a share from $80. The stock was recently moving down 0.3% at about $53.