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Gold Follows Oil Higher

The metal and mining stocks bounce as traders await word from the central bank.

Updated from 12:28 p.m. EDT

Gold reversed early losses Wednesday as news of dramatically lower-than-expected oil inventories boosted demand for the yellow metal and overshadowed other economic data.

The Energy Department reported a 3.3-million-barrel decline in inventories of crude oil, compared with expectations of an increase of 2.9 million barrels. Oil is seen as a key driver of inflationary pressures, and the rally in crude, which was recently trading at $61.18 a barrel on the New York Mercantile Exchange, likely spooked gold buyers who see bullion as a long-term hedge against a rising price level.

Bullion traders quickly reversed early losses and bid up contracts for December delivery of gold, with prices rising $3.20 to close at $590.80 an ounce on the Comex division of the Nymex. The bullion exchange-traded funds that hold the metal were lifting also:

iShares Comex Gold Trust

(IAU) - Get iShares Gold Trust Report

and

streetTracks Gold Shares

(GLD) - Get SPDR Gold Shares Report

were both up about 0.7% in recent trading.

Political issues provided yet further support for the yellow metal after a morning speech by George Bush outlined his strategy towards Iraq, Iran and North Korea. Investors also tend to buy gold as a safe harbor asset in times of war and other turmoil.

Early afternoon traders took their eyes off the oil and geopolitics to look at the

Federal Reserve Open Market Committee

policy statement, which indicated that short-term rates would remain unchanged at 5.25%. "The Committee judges that some inflation risks remain," the statement read, but also suggested the slowing economy may help reduce upward price pressures somewhat going forward. Last week Labor Department data showed core producer prices jumping an alarming 0.6%, compared with forecasts of 0.1%.

Comex futures trading was over by the time the Fed information came out, but spot bullion prices remained firm, recently up $1 for the day at $588.20 an ounce, according to Montreal bullion dealers Kitco.

Other economic news published at 10 a.m. EDT confirms continued weakness in the housing market, with September sales of existing homes falling 1.9% to 6.18 million, compared with a forecast of 6.25 million, according to data from the National Association of Realtors. In August, 6.3 million previously owned homes were sold.

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Observers agree the Fed is likely to take a more aggressive stance towards rising prices; this may augur further declines in the price of the yellow metal. Gold traded above $700 an ounce in May but has declined significantly since and more recently struggled to move back above the $600 level.

"The fact is there is general resolve about keeping inflation under control," says Jon Nadler, an analyst at Kitco. "That should put people on edge who are in the business of inflation hedges such as gold traders."

In the gold patch, shares of

Freeport-McMoRan Copper & Gold

(FCX) - Get Freeport-McMoRan, Inc. Report

were recently down about 1%, while shares of

Goldcorp

(GG)

were up 3.35%. The broader complex rose, in line with metals prices. Shares of the

Market Vectors Gold Miners

(GDX) - Get VanEck Gold Miners ETF Report

ETF were lifting 1.7% recently.

Elsewhere, shares of South African miner

Gold Fields

(GFI) - Get Gold Fields Ltd. Report

were gaining 4.1% recently, following the company's announcement of an executive shake-up.

In base metals, Comex December-dated copper contracts closed down 1.35 cents at $3.4045 a pound.

Deutsche Securities reiterated its buy rating on copper miner

Phelps Dodge

(PD) - Get PagerDuty, Inc. Report

and upped its stock price target to $110 from $100. Shares rallied on the news, up 1.6% recently.