Updated from 11:56 a.m. EDT
Worrisome news of rising consumer prices helped torpedo gold Friday.
December bullion futures shed $6.70 to close at $604.20 an ounce on the Comex division of the New York Mercantile Exchange, and the bullion exchange traded funds,
streetTracks Gold Shares
iShares Comex Gold Trust
, followed suit, each down 0.5% recently.
The chain of events started before the opening bell when the Commerce Department said its core personal consumption expenditure deflator rose 0.2% in August, putting its year-over-year increase at 2.5%, the highest in over a decade. It will likely lower the prospect of a cut in short-term interest rates anytime soon as the
tries to squeeze burgeoning price pressures out of the economy.
Gold often acts as a hedge against inflation but if the data compels the Fed to tighten monetary policy -- or, at least, resist easing -- that would be a negative for precious metals. The same news would likely have seen a rally in the metal if investors thought the Fed had turned dovish.
"This inflation data may have raised the specter of further Fed tightening to the currency markets," says Jason Shenker, an economist at Wachovia in Charlotte, N.C. "But any dollar moves associated with this may prove to be transitory."
Foreign exchange dealers reacted by marking the greenback higher, asking 118.1 yen for a dollar, up from 117.77 yen late Thursday. It was also showing strength against the euro, which was recently trading at $1.2682 vs. $1.2706 previously. And the rising dollar put downward pressure on gold, which tends to move inversely with changes in the price of the U.S. currency.
Shenker says he still sees a dip in short-term interest rates in the first quarter of 2007 as a slowing economy reduces inflationary pressure.
That said, St. Louis Fed President William Poole gave some hawkish comments in a speech Friday at Middle Tennessee State University: "Accepting higher inflation, or even a continuation of the current rate of inflation, in an effort to sustain current employment levels will only lead to more grief later," Poole said.
Meanwhile, although the Chicago purchasing managers index was higher than expected, more evidence of the predicted slowdown continues to roll in. The Economic Cycle Research Institute's Weekly Leading Index registered a drop of 0.9% for the period ending Sept. 22. That compares with a figure of minus 0.8% for the prior week and marks the ninth-straight decline according to the ECRI.
Chart watchers were not viewing recent trends positively despite the fact that the yellow-metal found support above the psychologically important $600 level.
"It's making a stair-step decline, which is normal for a bear market," says Rich Ishida, president of Pasadena-based MarketVane. "I see lower highs and lower lows."
Ishida says gold's bearish downtrend, intact since July, could continue through year-end, but he doesn't rule out a longer term rally resuming thereafter.
Elsewhere in gold, Sweden's Riksbank says it intends to sell 10 tons of bullion over the next 12 months, according to news reports.
Among the precious metals producers, the
Market Vectors Gold Miners
exchange-traded fund, was losing 0.1% by mid afternoon.
was off 2%. Industry stalwarts
were down 0.7% and up 0.7% respectively.
In base metals, Comex December copper futures closed 3.25 cents higher at $3.4605 a pound on concern that workers may strike Sunday at
Highland Valley copper mine, which produced 179,000 tons of the red metal in 2005, or about 1% of world supply.
Bear Stearns downgraded U.S. copper miner
to peer perform from outperform. Investors, however, focused on the potential Teck disruption and the stock was gaining 0.7% recently.
Elsewhere, shares of Chicago-based scrap dealer
were rising 4.6% after Canaccord Adams raised its rating on the stock to buy from hold with a $31 price target.