Gold Gains as Stocks Slide

Weak economic data give the yellow metal a boost even as the dollar rebounds from early losses.
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Updated from 11:33 EST

Further evidence of moderating economic activity weighed on the broader stock indices Wednesday, but sent gold soaring to almost $620 an ounce.

The Institute for Supply Management's index for October unexpectedly fell from 52.9 to 51.2 in September, well short of consensus forecasts of 53. The index is derived from a survey of purchasing managers and includes data on new orders and inventories, among other items.

Separately, the Commerce Department published data showing that construction spending fell 0.3% in September, compared with expectations of zero growth. The prior period was revised downwards from 0.3% to no growth.

"What the

Fed

is trying to do, is to precipitate a slowdown," says T.J. Marta, a fixed-income analyst at RBC Capital Markets. "I don't know that they would be too unhappy" with this data.

Marta adds that the economic news will be bearish for the U.S. dollar, as it likely shortens the time before policymakers believe short-term interest rates can be cut while minimizing the risks of unleashing inflation.

That's good news for the gold bulls since bullion prices tend to rally as the dollar falls, but not so much fun for equity investors who saw the

Dow Jones Industrial Average

pull back 50.67 points to 12,031.26, recently. Although the greenback started the morning weaker, losses were reversed by the afternoon with a dollar recently buying 117.03 yen, marginally up from 116.96 yen late Tuesday. It was virtually unchanged against the euro, which was trading at $1.2765 from $1.2763 a day before. The lack of currency price movement didn't bother the bulls, however.

"The sentiment is for higher gold prices," says Bernard Hunter, director of precious metals at Toronto-based bullion bank ScotiaMocatta. "And the funds are trading it that way." He adds that the action was spearheaded by professional investors and speculators.

That positive sentiment ignited a bullion rally, with contracts for December delivery of gold surging $12.50 to close at $619.30 an ounce on the Comex division of the Nymex. The gold exchange-traded funds,

iShares Comex Gold Trust

(IAU) - Get Report

and

streetTracks Gold Shares

(GLD) - Get Report

, followed suit, both bouncing about 2% lately.

"One of the biggest positive things is that gold is breaking its linkage with oil," says Peter Spina, chief investment analyst at Goldseek.com, noting that the price for crude and the yellow metal for a time tended to move in tandem. Spot futures contracts for the oil were recently off 14 cents at $58.59 a barrel on the Nymex. In addition, "there is strong physical demand underlying the market, and momentum players seem to be re-entering," Spina says.

Rallying bullion prices were helping lift the mining complex, with shares of the

Market Vectors Gold Miner

(GDX) - Get Report

ETF, rising 0.8% recently.

Also on the move was rock-crushing giant

Newmont Mining

(NEM) - Get Report

, which beat consensus third-quarter earnings estimates by a penny with income of 44 cents a share vs. forecasts of 43 cents. That compares to 28 cents earned in the same period of 2005. The Denver based company says it achieved sales prices of $615 an ounce for gold, vs. $435 an ounce in the third quarter last year. Expenses, however, also grew, with the cost to produce 1 ounce of gold reaching $318, compared with $236 in 2005.

Investors liked the news and the stock was jumping 2% recently.

In base metals, Comex December copper contracts tumbled 10.44 cents to close at $3.24 a pound.

"A sharp jump in copper stocks

up 4,675 metric tons is keeping somewhat of a lid on copper prices this morning," writes Edward Meir, an analyst at Man Financial, in a daily market brief. "We still maintain that copper could retest the bottom end of its trading range."

The lower prices for the red metal were impacting shares of U.S. copper miner

Phelps Dodge

(PD) - Get Report

, which were recently losing 3.9%.

Elsewhere, RBC Capital Markets trimmed its price target on Canadian smelter

Alcan

(AL) - Get Report

from $68 to $66 a share, but reiterated an outperform rating. Prudential upped its price forecast for shares of diversified miner

BHP

(BHP) - Get Report

from $31 a share to $35, but reiterated an underweight rating.

In recent trading, Alcan was down 3.6% to $45.43 while BHP was up 0.4% to $42.73.