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Gold Battles Back

Gold Battles Back
By Nick Godt
Markets Reporter
2/22/2006 5:26 PM EST

Gold is going through funny times. After hitting 25-year highs several weeks ago, the metal suffered a mini-meltdown. Now it's showing signs of life again.

After suffering a 5% drop from a high of $578 to a low of $549 per ounce last week, gold for April delivery has recovered $7 over the previous three sessions. It finished little changed on Wednesday, closing at $556.60 an ounce.

According to former Federal Reserve Chairman Alan Greenspan, gold's surge over the past few years was due to rising geopolitical tensions. According to many economists, including new Fed Chairman Ben Bernanke, gold serves as a good inflation indicator.

According to many investors and analysts who've joined the "gold bug" mania, high gold prices are reflecting the imbalances in the global financial system -- not least of which is the soaring U.S. current account deficit.

The deficit should pressure the dollar but the greenback has remained strong thanks to the Fed's relentless campaign to hike interest rates over the past few years. But with concerns about the dollar's long-term prospects and global investors needing to diversify their holdings, gold has been a beneficiary.

Add to this some strong jewelry demand from surging economies such as India and China, and investors can find myriad reasons to buy gold.

On Wednesday, a mixed bag of factors first served to push gold up to $557.40 per ounce. The January consumer price index came in higher than expected, although core prices were in line. A steep 2.8% drop in crude oil, however, relieved inflation anxiety on Wall Street, sending stocks higher but shaving gold's gains.

"Crude oil has become the new proxy for inflation and for gold," says Charles Nedoss, gold analyst at the Peak Trading Group.

The Dow Jones Industrial Average gained 68 points, or 0.62%, to 11,137.17. The S&P 500 index rose 0.75% to 1292.67 and the Nasdaq Composite advanced 0.9% to 2283.


LINK: http://www.thestreet.com/_pbear/markets/marketfeatures/10269894.html