Gold Follows Crude's Lead

The precious metal gets a lift from BP's shutdown of Prudhoe Bay.
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Updated from 11:12 a.m. EDT

Gold got another oil-fueled boost Monday after

BP

(BP) - Get Report

announced it would cut output by 400,000 barrels a day, 8% of total U.S. production, in order to deal with a pipeline leak in Alaska.

Prices for the benchmark December gold contract closed up $3.20 an ounce at $659.20 on the Comex division of the New York Mercantile Exchange, or Nymex. Gold has been tracking the price of oil lately, and crude oil was recently trading up $2.04 a barrel at $76.80, also on the Nymex.

"Oil above $76 is definitely a help," says Jon Nadler, an analyst at Montreal-based bullion dealer Kitco. But the gold market is also being buoyed by the weak July employment data released Friday, he notes. The data suggest the

Fed

may end its 17-step series of rate hikes when it meets Tuesday, boosting the prospects for a weaker U.S. dollar. The price of gold tends to move inversely with that of the greenback, which was recently trading at 115.12 yen vs. 114.42 late Friday, while the euro was at $1.2840 vs. $1.2877.

Nadler, however, is not so sanguine about the Fed. "I think they might just do one final tweak because they are much more spooked about the prospect of real stagflation than many believe," he says. "If they do hike rates, we are good for a $15 to $20 drop in the gold price."

Shares of the bullion exchange-traded funds followed the futures prices higher, with

iShares Comex Gold Trust

(IAU) - Get Report

and

streetTRACKS Gold Shares

(GLD) - Get Report

were recently both trading up.

Among the gold miners, Prudential upgraded its recommendation on

Barrick Gold

(ABX)

to neutral from underweight and UBS increased its price target on

Kinross Gold

(KGC) - Get Report

to $18 from $16.50 following Friday's announcement that it made second-quarter profits of 19 cents a share vs. a loss of 5 cents in the same period a year ago, and smashing consensus estimates of 12 cents. Shares of both were trading up mid-afternoon, as were those of

Freeport-McMoRan Copper & Gold

(FCX) - Get Report

,

Newmont Mining

(NEM) - Get Report

and

AngloGold Ashanti

(AU) - Get Report

.

The recent volatility in the gold price has been detrimentally affecting small-jewelry fabricators, an important segment in the demand equation for the metal, who are said to be minimizing their inventories to guard against price shocks, notes Friday's edition of the

Global Watch -- The Gold Forecaster

, a weekly newsletter.

However, "some banks are even agreeing to carry the risks on holding gold by asking for payment and fixing the price only at the time the jeweler sells his stock," the report states. Such a move should help mitigate risks as the all-important Indian wedding season starts in the fall.

Meanwhile, in base metals the war for Canada's nickel patch continues apace, unfazed by soaring energy costs. Toronto-based nickel miner

Inco

(N)

recommended shareholders reject

Teck Cominco

's

(TCK)

offer to buy the company. Instead management says it intends to continue with plans to merge with U.S. copper miner

Phelps Dodge

(PD) - Get Report

and will seek Ontario court approval Thursday.

Investors, some particularly vocal, such as Hedge Fund Atticus, remain disappointed with Phelps' merger desires. The stock was, however, was trading higher in the afternoon reversing earlier losses. Shares of Inco and Teck were slipping recently.

In Chile, union workers walked off the job at the Escondida copper mine, which is partially owned by giant diversified miners

BHP

(BHP) - Get Report

(57.5%) and

Rio Tinto

(RTP)

(30%). Shares in Rio were trading up recently while those of BHP were lower in mid-afternoon action.

"The mine is now operating at approximately 40% of capacity using contract staff as well as some non-union employees," says Illtud Harri, a BHP spokesperson, adding that "no decision has been made to hire extra workers at this stage."

Metal futures traders seem to have largely discounted the prospect of the strike action near term, with September Comex copper futures slipped 2.2 cents to close down $3.615 a pound, aided by the prospect of slower U.S. economic growth.

"Given this scenario, it is not surprising that some funds are using this ongoing strength to slowly reduce their exposure to the metals," writes metal analyst William Adams in a daily report from Basemetals.com. "Far better to sell into a

generally rising market than into a falling one."