Commodities Rally Anew

Gold, silver and copper rise after news of stronger-than-expected durable goods and housing data.
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Updated from 12:00 p.m. EDT

Gold and metals posted strong gains for the second day in a row on Wednesday after strong U.S. economic data supported the outlook for continued demand for commodities.

Gold for June delivery finished up $7.80, or 1.2%, to $642.0 an ounce. Silver for May delivery rose 25 cents, or 2%, to $12.81 an ounce. Copper for May delivery gained 7.45 cents, or 2.2%, to $3.3950 a pound, off a fresh record high at $3.49.

Metals received a lift after news that U.S. orders of durable goods had increased 6.1% in March, much more than economists expected. Economic strength was again evident after a report showed new-home sales increased by 13.8% last month, also far above economists' expectations.

"It would seem like the outlook for the global economy is improving with the U.S., eurozone and Japanese numbers this week and that should mostly countervail any partially negative near-term influence of weaker oil prices," according to Nell Sloane, metals analyst at NSFutures.com.

Crude oil was recently down 68 cents at $72.20 even after news of falling U.S. inventories. Crude prices receded Tuesday after President Bush announced the U.S. would boost supply by temporarily suspending deliveries to the Strategic Petroleum Reserve.

Still, tensions over Iran's nuclear ambitions remain high before the Friday expiration of the U.N. Security Council's deadline for Tehran to stop its nuclear program. Concerns over Iran helped push crude futures above $75 last Friday.

Gold, which acts both as a safe-haven asset against geopolitical uncertainty and as an inflation hedge against rising energy prices, should remain supported at least until then, according to James Moore, a metals analyst at TheBullionDesk.com in London.

"Gold has seen some consolidation and needs to carry more in the $620 to $635 area, but underlying sentiment is still bullish," Moore says. "The deadline for Iran will be crucial on Friday, and if we see talk of sanctions from the U.N. or the U.S., it will boost oil and gold."

Gold and other metals also continued to be supported by dollar weakness on Wednesday. Dollar-denominated commodities benefit from a weak greenback as it takes more of the currency to buy the same amount. On Wednesday, the dollar received a boost vs. the yen after the strong U.S. data, but it fell to a seven-month low vs. the euro.

The dollar has been on a downward trend as markets expect the

Federal Reserve

to soon stop its 22-month-long campaign to raise interest rates, which had helped support the greenback through last year. Strong data this week pushed back expectations of an end to U.S. rate hikes, but strong economic data out of Europe are also fueling expectations of more hikes by the European Central Bank.

For many gold bugs, a weak dollar is the cornerstone of an ongoing bullish case for gold. Yet many expect the precious metal's rally to at least slow down after it added over $100 in just a few months.

Nevertheless (or maybe in a contrarian sign), more and more bullish calls about the "fundamental" case for gold are made by analysts on Wall Street. Standard & Poor's metals analyst Leo Larkin boosted his 2006 forecast for the price of gold to $710 from $600 previously.

"In our opinion, the supply and demand dynamics have set the stage for a multi-year bull market for gold," Larkin wrote. "Even as companies begin new projects, decreased exploration in the 1990s has caught up with the industry

and it generally takes a few years for a new mine to become operational."

Silver, meanwhile, has been leading the charge among precious metals so far this week, as rumors swirl around the market about the imminent launch of a silver exchange-traded fund (ETF). The fund, much like the

streetTRACKS Gold

(GLD) - Get Report

, should make investing in the commodity easier for retail investors.

The ETF, owned by British bank

Barclays

, is still awaiting regulatory approval by the

Securities and Exchange Commission

.

"There are rumors that the SEC might give the nod to the ETF in the next couple of days," says Moore. Barclays, he says, has recently deposited 1.5 million ounces of silver with a custodian, fueling the speculation.

The short-term risk, however, is that the launch of the ETF might trigger a correction in silver, which has rallied sharply since the beginning of the year. "If you look at the previous ETFs, such as gold's, their launches were followed by a period of profit-taking afterwards in a typical 'buy the rumor and sell the news' kind of way," Moore says.

Meanwhile, the stocks of mining companies were following metals higher on Wednesday. Both the Philadelphia Gold and Silver index and the Amex Gold Bugs index were recently gaining 0.9%, while the CBOE Gold index was up 0.8%.

Among the biggest gainers,

Glamis Gold

(GLG) - Get Report

was rising 5.2%,

Golden Star Resources

(GSS) - Get Report

was up 2.4%, and

Newmont Mining

(NEM) - Get Report

, which declared a regularly quarterly dividend of 10 cents a share on Wednesday, was up 2.3%.