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Metals Sink on High Dollar, Reports

Simon Constable

Updated from 12:12 p.m. EDT.

Metals prices took a dive Wednesday, as a new government report pointed to a robust industrial sector and sent the dollar higher.

June-dated gold contracts shed $13 to close at $661.50 an ounce, while July silver contracts lost 39 cents closing at $12.93 an ounce in the New York futures markets.

The bullion exchange-traded funds, which hold stocks of the metals, were losing also. The streetTracks Gold Shares(GLD Quote) was losing 1.4%, and the iShares Silver Trust (SLV Quote) was lower by 2.2%.

The Federal Reserve says industrial production grew a robust 0.7% in April, rebounding from a decline during March. Capacity utilization, which gives a measure of firms' ability to increase output, also rose.

"The industrial sector is showing a huge rebound, and that was an area of the economy we were very concerned about," says Ellen Beeson Zentner, a U.S. macroeconomist at Bank of Tokyo-Mitsubishi UFJ in New York. "When you look at all of the sectors, improvement was very broad."

Zenter also notes that the news should be bullish for U.S. currency. Foreign-exchange investors agreed and warmed to the data by bidding up the greenback.

One dollar was buying 120.69 yen, up from 120.26 yen late Tuesday. One euro was buying $1.352, down from $1.3589 previously. Over time, the price of dollar-denominated assets such as gold and silver tend to fall when the value of the dollar increases.

Other bad news for gold came in the form of a new report from the World Gold Council, which says purchases of gold by investors dropped 26% to 147 tons in the first quarter, compared with the same period a year earlier.

Overall gold demand, which includes jewelry and electronics, was up 4% in the quarter. But the bullion bulls shouldn't get too sanguine, as it is robust investment demand which has historically been the key to higher prices for the metal, as Jeff Christian, managing director at CPM Group, has noted repeatedly.

In the precious-metals patch, Harmony Gold(HMY Quote) and Agnico Eagles Mines(AEM Quote) were following the metal price lower, down 1.8% and 3% respectively.

Shares of Randgold Resources(GOLD Quote) were bucking the sector softness, up 0.5% in recent action.

As for base metals, copper prices slipped 12 cents to close $3.42 a pound, largely prompted by the dollar action. But the move was also affected by a drop in housing permits issued during April, which augers lower construction activity in the future and hence lower copper demand.

Copper is used for electrical wiring in new dwelling construction.

The PowerShares DB Base Metals(DBB Quote) ETF, which tracks other industrial metals as well as copper, was sinking 2.8%.

Shares of Southern Copper(PCU Quote) were sliding 0.4% in recent action.