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Jewelry Makers Prop Up Gold

Simon Constable

Gold futures advanced Thursday as seasonal demand from jewelry makers provided support for higher prices.

April-dated bullion contracts added $5.50 to close at $662.80 an ounce on the Comex division of the New York Mercantile Exchange. The PowerShares DB Gold(DGL Quote) exchange-traded fund was higher by 1.4%.

The ETFs that hold inventories of bullion, iShares Comex Gold Trust (IAU Quote) and streetTracks Gold Shares (GLD Quote), each were up about 1.4%.

"The jewelry industry is starting to place orders for the second quarter, for Mother's Day, graduation and weddings," says Jeff Christian, managing director at the New York-based specialty consulting firm CPM group. About two-thirds of the total gold supply in 2006 was used in making jewelry, estimates show.

On the economics front, a lackluster wholesale inventory report from the Commerce Department kept the dollar weak. At the same time, data showing new claims for unemployment insurance were roughly in line with estimates.

The dollar was recently buying 121.17 yen, up from 120.61 yen late Wednesday. Euros were being traded at $1.3032 vs. $1.3011 previously after the head of the European Central Bank hinted that the ECB might be close to raising rates. The value of the greenback and gold tend to move in opposite directions.

As for geopolitics, North Korea has agreed in principal to start the process of ending its nuclear activities, the Associated Press reports. Six nations, including the U.S., are holding talks in Beijing about North Korea's atomic program. Some investors see gold as a safe-haven investment during periods of political upheaval, and the news of progress in Asia will likely help reduce concerns.

Turning to the chart watchers, at least one sees the potential for an upside breakout.

"Gold has been coiling within a triangle since Feb. 1," says Joe Palmisano, a technical analyst with IDEAglobal in New York. "Short term, I'm looking for a measured move up to $675-$680."

A triangle formation occurs when the price trades in an increasingly narrow range, forming the shape of a pennant on a chart. The range becomes tighter until resistance or support is broken, at which point a large move up or down is expected.

Palmisano says such a break should come within a couple of trading sessions.

In the gold patch, the Chicago Board Options Exchange Gold Index rallied 1.2%. Component stock Goldcorp(GG Quote) gained 3.6%.

Turning to base metals, copper contracts lost a penny to close at $2.45 a pound on the Comex, with at least one analyst seeing continued softness for the foreseeable future.

"The current prices are still [way] above the marginal costs of production of even the highest cost producer," says Neil Buxton, a managing director at GFMS Metals Consulting in London. "The bottom line is that you won't see a supply response" of cutbacks in output.

Unlike some other analysts, Buxton doubts inventory restocking by China will absorb enough metal to counterbalance supply.

Elsewhere, Citigroup was busy in the aluminum segment, upgrading shares of both Alcan(AL Quote) and Alcoa(AA Quote) to buy from hold. That helped boost the shares 2.4% and 1.5%, respectively.

As for ferrous metals, JP Morgan dinged AK Steel(AKS Quote) down to a neutral rating from overweight, sending the shares down 1.5%.