Geopolitics Benefit Gold

Ongoing angst about Iran's nukes helps the metal rally despite weakness in crude prices.
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Updated from 11:50 a.m. EDT

Gold and other metals were rebounding from the previous day's slump Tuesday, as geopolitical tensions remain high and the dollar resumed its decline.

Gold for June delivery finished up $10.30 at $634.20 an ounce. Among other metals, silver rebounded solidly after falling sharply on

Monday. Silver for May delivery gained 78 cents to $12.56 an ounce. Copper for May delivery advanced 20.95 cents to $3.3205 a pound, after touching a new record high at $3.3250 earlier.

Metals took their early cues from geopolitical tensions and the price of crude oil, which rose to $74 a barrel in early trade. But crude turned lower after President George W. Bush said the U.S. would boost the supply of crude by temporarily suspending deliveries to a strategic reserve.

Crude for June delivery was recently down 43 cents at $72.90 a barrel.

Yet tensions over Iran's nuclear ambitions, which pushed crude futures above $75 on Friday, remain high just days before the expiration of the U.N. Security Council's April 28 deadline for Tehran to stop its nuclear program.

Over the weekend, Tehran said its nuclear program is "irreversible." On Tuesday, its chief nuclear negotiator Ali Larijani said Tehran would break off relations with the International Atomic Energy Agency if trade sanctions are imposed on Iran. He also said Iran would "hide" its nuclear program if it is attacked, according to the

BBC

.

Israel, which on Monday called Iran's nuclear program the biggest threat to Jews since the Nazi Holocaust, said Tuesday that it would launch a satellite to monitor Iran's nuclear activities, according to

Reuters

.

"Geopolitical uncertainties implies higher gold, silver and precious metal prices," according to Chintan Karnani, metals analyst with Delhi, India-based Insignia Consultants.

The volatility seen in prices in recent days is being fueled by nervous retail investors, but funds continue to buy on the dips, Karnani says.

Support for gold and other metals was also found in the continued decline of the dollar. Tuesday's drop was mostly against the euro after Germany's Ifo's business confidence index surged to a 15-year high.

A weak dollar raises the value of dollar-denominated commodities, such as gold, as it takes more of the currency to buy the same amount of commodity.

The dollar bounced back midmorning after stronger-than-expected consumer confidence and existing-home sales data raised the possibility of Fed tightening continuing beyond May 10. But the euro still recently traded at $1.2408 vs. $1.2403 late Monday.

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.

The dollar had come under pressure over the weekend, as the Group of Seven most industrialized countries put pressure on China to let its currency, the yuan, appreciate. The G7 also sounded a note of caution about structural imbalances in the world economy, singling out the soaring U.S. current account deficit.

Many gold bugs believe that the precious metal has been soaring to reflect "unofficial" inflation expectations, such as soaring energy prices, and an expected sharp decline of the dollar, which would boost the need for a "hard-asset" currency.

But Steven Saville, editor of

The Speculative Investor

, notes that inflation expectations the world over remain tame, as seen in the relatively low spread between the yields of short-term and long-term bonds.

Furthermore, while gold has risen sharply in most world currencies, it's been very weak relative to a basket of industrial metals, according to Saville. This, he says, signals that "most people believe the commodity rally to have almost everything to do with real economic expansion (the China/India growth story in particular) and almost nothing to do with inflation."

The good news, Saville goes on, is that gold's bull market still lies in the future, because no one expects a serious inflation problem.

The unexpectedly strong global growth picture is illustrated, for instance, by the bullish reversal in steel prices, which helped

U.S. Steel

(X) - Get Report

post first-quarter earnings that handily beat analysts forecasts.

The Pittsburg, Pa. steel maker said its net income fell to $252 million, or $2.04 per share in the first quarter, compared with $455 million, or $3.51 per share, in the year-earlier quarter. The consensus forecast of analysts polled by Thomson Financial was for earnings of $1.48 per share.

U.S. Steel's stock was nonetheless falling 2.4% in recent action. The stock has jumped over 40% since the beginning of the year, as the market downgraded expectations of a slump in steel prices due to Chinese overproduction.

MorningStar metals analyst Scott Burns recently placed the steel producers he covers under review, expecting "material increases" in the fair value estimates he has on all these stocks. These include

AK Steel Holdings

(AKS) - Get Report

,

Mittal Steel

(MT) - Get Report

, and

Nucor

(NUE) - Get Report

.

"Steel markets have rebounded significantly from a tough second half of 2005," Burns writes in a research note. "Global demand remains strong and the inventory overhang that plagued the sector has been worked through" while input costs have declined from their 2005 highs.

Goldman Sachs analyst Aldo Mazzaferro, who has an outperform rating on the stock, issued a positive note on U.S. Steel Tuesday. "We believe earnings will continue to surprise investors with both their strength and sustainability, and we expect

U.S. Steel's shares to enjoy higher valuation multiples going forward as investors become more convinced of the sustainability of the cycle," he wrote.

Goldman Sachs owns 1% or more of U.S. Steel's common equity and provides investment banking services for the company.

Meanwhile, the stocks of metals miners, which dropped along with the metals on Monday, also moved higher Tuesday. The Philadelphia Gold and Silver index was recently up 0.9%, the Amex Gold Bugs index was gaining 0.7%, and the CBOE Gold index was up 0.6%.

Among the biggest gainers,

Golden Star Resources

(GSS) - Get Report

was up 1.6%,

RandGold Resources

(GOLD) - Get Report

was up 2.8%, and

Gold Corp

(GG)

was up 2.3%.

Agnico-Eagle Mines

(AEM) - Get Report

was up 1.25% after saying its first-quarter production and its mine site costs were in line with previous guidance.