Price Data Spur Gold Buying

An increase in a key inflation measure had investors scrambling to buy hard assets and sent precious metals rallying Thursday in New York.

Gold contracts expiring in August were rising $4.60 at $663.90 an ounce in recent action. Contracts for July delivery of silver were adding 24 cents at $13.36 an ounce.

Helping the metals was a report from the Commerce Department on the economy. The government said that gross domestic product grew at only a 0.6% annual pace in the first three months of the year, but the chain deflator, which measures prices of goods and services, jumped 4%, more than double the rate in the fourth quarter.

"The Federal Reserve definitely has an inflation problem," says T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York.

Indeed, the minutes of the last Fed meeting, released during the prior session, indicated that policymakers still have the threat of rising prices on their radar. Even though officials are closely monitoring the slowdown in housing, their primary concern appears to remains inflation.

After the data were released, traders wanting a hedge against the wealth-depleting effect of inflation moved to buy bullion, figuring the metals will maintain their real value relative to paper currency.

Elsewhere, there was more evidence of some investors losing their love for streetTracks Gold Shares(GLD Quote), the largest gold exchange-traded fund. New figures show bullion holdings by the ETF dropped nine tons Wednesday to 464 tons. Gold Shares inventories, which are held in London vaults, reached their peak of 501 tons on April 17 before reversing over the past few weeks.