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Gold Dips, Copper Tumbles

The yellow metal's uptrend remains intact but the red metal's weakness is a concern amid falling industrial production.

Updated from 11:43 a.m. EST

The copper market turned red Friday as prices dropped over 6% on concerns over growing stockpiles.

December-delivery copper futures closed off 22.05 cents at $3.0885 a pound on the Comex division of the Nymex, dragging down shares of producers

Phelps Dodge

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Southern Copper


by 5.7% and 6.4%, respectively. The fall puts copper prices well below the psychologically important $7,000 a ton level (or $3.175 a pound).

In addition to widely reported news of higher copper inventories in China, observers say the pain may be far from over.

"The long-term uptrend is under serious test here," says Mo Ahmadzadeh, president of Mitsui Bussan Commodities in New York. "If it is broken then there will be a welter of shorts entering the market."

Others see the weakness having wider implications across the complex.

"Copper seems to be acting like the spoiler," writes Edward Meir, an analyst at commodity brokers Man Financial. "If it continues to weaken ... it could very well undermine the stronger base seen in the rest of the complex." All eyes will be on a "bevy of U.S. stats" due out next week, he says.

A slowing industrial sector could exacerbate the price weakness also.

"The outlook for industrial output growth is lackluster," says Anirvan Banerji, director of research at the New York-based Economic Cycle Research Institute and a

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Banerji cautions that other recent data showing growth of U.S. industrial production in September at a six-year high of 5.6% is misleading, in part because of the favorable comparison related to a dip in output a year ago because of Hurricane Katrina.

What he's focusing on is a smoothed industrial-production growth rate of 3.4% for September, down from 6.2% in June. "The rate of growth has slowed quite distinctly and is poised to go down further," the cycle watcher says, although Banerji doesn't see it going negative just yet.

ECRI also says its Weekly Leading Index for the period ending Nov. 3 rose 0.3%, following 14 straight weeks of declines, although Banerji says the change is only marginally significant. The prior period showed a decline of 0.3%.

Other factors are also weighing on ferrous metals, with Chinese steel prices projected to decline through year-end, according to Shanghai-based Growell Research & Consulting, in its

China Steel Briefing

newsletter. The note cites colder weather, government-mandated work stoppages and export taxes as reasons for lower demand, while supply looks set to stay stable.

Shares of

U.S. Steel

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were slipping 2.2% and 2.4%, respectively, in recent action.

Tuesday will see data on producer prices, retail sales and inventories, while on Thursday consumer prices, industrial production and capacity utilization will be announced. Housing numbers will round out the week Friday, which could have implications across the board for the metals markets.

Banerji's prediction of slowing economic growth may ease concerns over inflation, which in turn could be bearish for the yellow metal, which is frequently purchased as a long-term hedge against rising prices.

Thursday saw gold ease, with contracts for December delivery of bullion closing down $6.70 at $630.10 an ounce on the Comex. The exchange-traded funds that hold the metal,

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iShares COMEX Gold Trust

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, followed futures prices, each down about 0.9% recently.

The modest pullback, however, doesn't break the recent uptrend, which has seen spot prices rally from under $580 an ounce in mid-September.

"It's making higher highs and higher lows, which is a positive sequence," says Rich Ishida, president of Pasadena, Calif.-based Market Vane. He notes a rise in the bullish consensus for gold to 66% bullish, up from 62% Wednesday, according to Market Vane.

Ishida identifies $650 an ounce as the next price target, with technical support at around $610.

In the mining complex, the

Amex Gold Bugs Index

was slipping also, off 2.6% lately. Bucking the trend were shares of Vancouver-based

Eldorado Gold

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, up about 1%.