Gold Pops After Factory Data

Updated from 11:52 a.m. EST

Gold broke higher Wednesday after news of softness in the manufacturing sector combined with worries about terrorism and North Korea's atomic program to sink the dollar.

Contracts for April delivery of bullion closed up $7.70 at $657.90 an ounce on the Comex division on the New York Mercantile Exchange. Prices reached an intraday high of $660.30 before partially retracing.

The exchanged traded funds that hold the metal, streetTracks Gold Shares(GLD Quote) and iShares Comex Gold Trust(IAU Quote), both gained about 0.8%.

Although the first news of the day -- better-than-expected fourth-quarter GDP growth and lower-than-forecast wage inflation -- boosted the dollar early on, that quickly turned around following a weak report on Midwestern factory activity and shaky construction statistics.

The Chicago purchasing managers' index fell to 48.8 in January, way below consensus forecasts of 52 and down from 51.6 in December. A figure below 50 indicates a contracting manufacturing sector.

"Manufacturing is not getting any better and it was starting from a low base," says Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

He believes a weaker economy will emerge through the first and second quarters, which should lead to a cut in short-term interest rates by Federal Reserve policymakers during the summer. He's also forecasting further declines in the dollar against the euro.

Commenting on the construction industry, which saw spending drop 0.4% in December, T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York, writes in a research report that, "It may indicate that the building part of the correction is unfolding faster than [previously] thought."