Gold Bounces Back

The metal rises with crude, and copper holds steady despite Prudential's downgrade.
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Updated from 11:26 a.m. EDT

Gold bounced back on Friday, with a weak dollar and crude oil at $75 a barrel giving bulls cause to cheer after a

heavy selloff in most metals on Thursday.

Gold for June delivery finished up $12.40 at $635.50 an ounce, making up for the previous day's losses. On Thursday, gold plunged more than $20 intraday after hitting a 25-year high of $649, before recovering some ground to close at $623 an ounce, a 2% drop for the day.

Among other metals, silver for May delivery added 4.40 cents to $12.965 an ounce. Copper, which had survived Thursday's selling trend, broke new highs on Friday. The May contract finished up 17.85 cents at $3.1405 a pound, a fresh all-time high.

Copper advanced despite negative comments on the metal by Prudential Securities, which also downgraded industry giants

Freeport McMoRan

(FCX) - Get Report

and

Phelps Dodge

(PD) - Get Report

to underweight from neutral.

Prudential sees the prospects for copper turning bearish. Analyst John Tumazos lowered both his estimate for demand growth for this year and next due to expected lower demand from the U.S. auto and housing industries, and further adverse impact on demand from oil above $70 and interest rates above 5%.

Tumazos is also worried that a lot of copper buyers are substituting the metal with cheaper versions or seeking to economize its use, given that the price of copper has quadrupled over the past year.

Furthermore, China has been increasing its output of refined copper and boosting its exports, while Chinese copper consumption has tapered off in the first few months of the year, Tumazos says.

Finally, the analyst believes that large inflows of speculative capital might now have topped the $5 billion of commodity index fund capital with long positions on copper. Such speculation would "amplify any trend or reversal in trend," he says.

On Friday, the market seemed to ignore Tumazos' call on the metal. The impact of his downgrades on two metal-mining stocks seemed mixed. Phelps Dodge was recently up 2%, while Freeport was down 0.3%.

What Correction?

Thursday's selling pressure had spread to most metals and commodities, fueling talk that a long-overdue correction was beginning in a sector that has been red-hot over the past few weeks.

But Friday's early bounce was giving bulls hope that yet more upside might still be in sight for gold and other metals.

"There's no doubt that gold had moved too far too fast and that some profit-taking was overdue," says Frederic Panizzutti, a gold analyst at MKS Finance in Geneva, Switzerland. "But as we're seeing some buying today, we'll have to see whether the market sees a buying opportunity or if there's more

profit-taking in store for next week."

One bullish hint was that gold moved up even as the price of crude oil, which the precious metal has been tracking pretty closely, had opened under pressure.

The early weakness came after news that

Royal Dutch Shell's

(RDS-B)

Mars platform in the Gulf of Mexico, which was disabled by Hurricane Katrina last August, would resume production earlier than expected.

But oil bounced back as the market again turned its attention towards the standoff between Western countries and Iran, the world's fourth largest producer of crude oil. In recent action, crude for June delivery was gaining $1.26 to $74.95 a barrel, after briefly touching the $75 level.

By the end of next week, a United Nations Security Council deadline for Iran to abandon its nuclear program will expire. But Iran has shown no sign of backing down, saying its program is for civilian use. Meanwhile, two weeks after media reports suggested the U.S. is considering a military attack of Iran, President George W. Bush on Tuesday said that all options remained on the table.

Meanwhile, gold -- which works both as a hedge against inflation and as a safe-haven asset -- continues to draw support from crude oil above $70 a barrel, and from the geopolitical tensions underpinning oil's rise.

On Friday, metals also drew support from a weak dollar, which resumed its downward trend after Sweden's central bank said it had cut its dollar holdings almost in half. The greenback has been on a downtrend since late 2005 amid expectations that the

Federal Reserve

will soon stop its 22-month-long campaign to raise interest rates.

A weak dollar is typically bullish for dollar-denominated commodities, such as gold. For gold bugs, further dollar weakness is expected once the Fed stops raising rates, as currency markets will turn their attention to the soaring U.S. current account deficit.

Meanwhile, the stocks of metals miners were still also moving higher after falling sharply on Thursday. The Philadelphia Gold and Silver index was recently up 3.3%, the Amex Gold Bugs index was up 3.4%, and the CBOE Gold index was adding 3.8%.

Some of the biggest gainers included

Gold Fields

(GFI) - Get Report

, recently up 8%,

Harmony Gold

(HMY) - Get Report

, up 5.1%, and

RandGold

Resources

(GOLD) - Get Report

, up 6%.

Elsewhere, Charlotte, N.C.-steel maker

Nucor

(NUE) - Get Report

was rising 1.8%. It fell 4% Thursday after posting earnings that beat expectations and forward guidance that was in line with previous forecasts.

Citigroup came to Nucor's defense on Friday, raising its 2006 earnings estimate to $9.50 per share (from $8.92 previously), its 2007 estimate to $8.70 (from $8.50) and its 2008 estimate to $7.45 from $7.30.

Analyst John Hill also lifted his price target to $133 from $104 and reiterated his buy rating on the stock.

"We believe that the post-reporting selloff in Nucor shares is unjustified, and creates opportunity in a sector-leading name, boasting both internal and external catalysts," he wrote.

Realized prices for U.S. steel makers have recovered after weakness late last year and earlier this year due to fears of Chinese overproduction, high U.S. price premiums and rising imports of steel, Hill says. Strong demand globally has once again boosted prices in Asia and Europe, as well as in the U.S.

Among the positive internal catalysts for Nucor, Hill says the firm's production is running above forecasts while it's seeing strong demand all around, with Nucor's backlog of orders at "record levels" across all of its product lines.

Citigroup has a significant financial interest in Nucor, makes a market in its securities and has provided non-investment banking, securities-related services for the company over the past 12 months.