Tame CPI Slams Gold

Updated from 11:27 a.m. EDT

Benign inflation data gave early holiday gifts to stock traders. But not to gold dealers, who saw the price of bullion plunge in Friday's market action.

Contracts for February delivery of gold closed down $11.80 at $619.10 an ounce on the Comex division of the Nymex. The bullion exchange-traded funds streetTracks Gold Shares(GLD Quote) and iShares Comex Gold Trust(IAU Quote) were both falling, off about 1.7% recently.

New Labor Department data revealed lower-than-expected growth in the consumer price index, spurring stocks higher with the Dow Jones Industrial Average recently up 0.3% at 12,450.57. The CPI figures showed zero growth during November vs. the consensus forecasts of 0.2%. The headline numbers were identical to those for the core rate, which excludes the volatile food and energy components.

"In terms of economic data, Santa delivered early," says Jason Schenker, an economist at Wachovia in Charlotte, N.C. "Ameliorating price pressure continues to pave the way for Fed rate cuts."

Schenker predicts the Federal Reserve will lower short-term interest rates by a quarter point twice during the first half of 2007, with the first coming in March and the other by the end of June at the latest. Such events should keep the dollar depreciating "on trend," he says.

The reaction in the foreign exchange markets was mixed. One dollar was recently buying 118.055 yen, down modestly from 117.83 late Thursday. The euro was changing hands for $1.3081, down from $1.3149 a day earlier.