Gold Finally Ends Lower

Profit takers emerge in it and other metals after a roaring week.
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Updated from 12:24 p.m. EDT

A roaring week ended with profit-taking in gold and other metals Friday.

Gold for June delivery fell $9.70, or 1.34%, to $711.80 an ounce. It earlier reached $732, a level unseen since September 1980.

Gold had resisted early selling pressure, benefiting from ongoing dollar weakness even after news that the U.S. trade deficit unexpectedly narrowed in March.

But some profit-taking was overdue, according to Brien Lundin, editor of the Gold Newsletter. Gold has gained close to $200, or 40%, since the start of the year, and has gained roughly $40, or 6%, in the past week alone, as the metal easily breached the $700 level.

"I'm pretty pleased that we're having some kind of pull-back," Lundin says. "I'd be pleased to see some of the froth come out of the market."

Other metals, such as silver and copper, had advanced even more this week, in what seems to be an unstoppable rally for the metals. Both silver and copper, however, also gave back some gains on Friday.

Silver for July delivery dropped 70 cents, or 4.69%, to $14.23 an ounce, after reaching a 25-year high at $14.93 on Thursday. As for copper, the July contract fell 5.9 cents, or 1.5%, to $3.86 a pound, after touching a new all-time high at $4.04 on Thursday.

According to Nell Sloane, metals analyst at NSFutures.com, the weakness might have been sparked by concerns of slowing physical demand from China, which reported lower import figures. In addition, Shanghai's copper inventories posted big gains this week, she notes.

Yet, Lundin doesn't believe that Friday's pull-back is the beginning of a correction. "I'm optimistic for a rebound early next week," he says, noting that speculative positions in gold remain well below where they stood at the last peak in February, when gold was $150 below current levels.

In addition, "even at these levels, we've not seen a big drop in

physical demand from Asia and elsewhere," Lundin says. "On the contrary, there's new physical demand from de-hedging

by producers."

Gold also remains supported by dollar weakness, even after news that the trade deficit narrowed to $62 billion in March from a revised $65.6 billion in February. Economists were expecting the deficit to widen to $67.5 billion

While this should have been positive for the dollar, the greenback continued to slump. In recent action, the dollar was still trading near 1-year lows vs. the euro and 8-month lows vs. the yen.

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 the metal.

The currency market has turned negative on the dollar on expectations that the

Federal Reserve

will soon pause its 22-month-long campaign of raising interest rates.

Even though the Fed stopped short of sending such a signal when it hiked rates this week, it still sounded more dovish than previously, according to Ashraf Laidi, currency strategist with MG Financial Group.

The Fed's statement referred to expectations that economic growth will "moderate" due to the "cooling of the housing market," a reference that wasn't as dovish as the market expected, but was still more so than the body's previous statement, Laidi says.

"The

Fed's touch of dovishness was not so much noticed in the media, but is well noted by the dollar," he says.

Gold bugs believe that once the Fed stops raising interest rates the dollar will resume a multiyear decline -- interrupted in 2005 due to the Fed's tightening campaign -- as currency markets start paying attention to the soaring U.S. current account deficit. This should fuel demand for gold, the currency substitute of choice, they say.

Another dollar negative was a drop in the participation of foreign bidders in Thursday's auction of 10-year Treasury bonds. Foreign bids were at 30%, their lowest level in 15 months.

Meanwhile, gold should also remain supported by safe-haven flows ahead of the weekend amid tense geopolitical developments, most noticeably the stalemate over Iran's nuclear ambitions, according to Sloane.

However, she says that weakness in the broad stock market on Wall Street this week might also be impacting sentiment for metals.

In fact, the shares of metal-mining companies were sharply lower on Friday, with the Philadelphia Gold and Silver index losing 4.4%, the Amex Gold Bugs index down 5.3% and the CBOE Gold index losing 5.2%.

Among the biggest decliners,

RandGold

(GOLD) - Get Report

was losing 10.7%,

Coeur d'Alene

(CDE) - Get Report

was down 8.5%, and

Hecla Mining

(HL) - Get Report

was down 10.2%.

IamGold

(IAG) - Get Report

was losing 4.6% even after reporting better-than-expected first-quarter earnings.

Mittal Steel

(MT) - Get Report

was down 1.9%. The Rotterdam, Netherlands, steel maker posted a year-on-year drop in first-quarter earnings, but beat expectations and said it was upbeat about an ongoing recovery in the steel market.