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Tame CPI Slams Gold

Simon Constable

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) and iShares Comex Gold Trust(IAU) 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.

In other economic news, the Economic Cycle Research Institute says its Weekly Leading Index jumped 2.8% in the week to Dec. 8, marking the sixth straight increase according to revised data. The indicator rose 1.9% in the prior period.

Such forward-looking measures do augur for future strength in the economy. It's worth noting that if the economy looks too robust, then the Fed may not feel as comfortable about lowering rates early on in the year. That scenario would likely keep the dollar higher and gold lower than they would otherwise be. Gold prices tend to move inversely with those of the U.S. currency.

Back with bullion, technical analysts see the session's dip as part of a repeating year-end trading pattern.

"It's not unusual to see a pullback in December," says Tony Raia, an analyst at Chicago-based futures broker Linn Group, who notes the muted response to the economic data by foreign-exchange traders.

With the closing price now under $622, Raia expects to see continued selling down to $603 in the next two sessions, with buying kicking in at around $600 to likely lend firm support.

Among the miners, Freeport McMoRan Copper & Gold(FCX) was shedding 0.7%. Earlier in the session, Freeport was rallying on speculation that Barrick Gold(ABX) may want to purchase the company.

Elsewhere, shares of Newmont Mining(NEM) were losing 1.5% recently.

In base metals, contracts for March delivery of copper closed down 4.1 cents at $3.0165 a pound on the Comex.

In the energy markets, armed men staged an attack on a Royal Dutch Shell (RDSA) facility in the Niger Delta area, Bloomberg reports. The news did not seem to spark investor concern, as Shell ADRs were recently down 0.4% at $70.93.

Near contracts for light sweet crude were rallying 64 cents at $63.15 a barrel on the Nymex.

Among other majors, shares of BP(BP) were off 0.3%, while those of Hess(HES) were falling 1.5%.