Gold Jumps on Data, Diversification

Trade-gap data and China rumblings ignite a 3% rally.
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Updated from 11:27 a.m. EST

Gold shot higher Thursday in the face of ambiguous data, boosted by reports that China may up its bullion holdings.

December-dated futures closed up $18.50 at $636.80 an ounce on the Comex division of the Nymex. The exchange-traded funds, which hold the metal, were rallying also, with

streetTracks Gold Shares

(GLD) - Get Report

and

iShares Comex Gold Trust

(IAU) - Get Report

both up about 3% recently.

Although prices for the yellow metal were already gaining a healthy $8.70 by midmorning, it was news from

Reuters

that the Bank of China's Zhou Xiaochuan "is considering various options for diversification," of foreign-exchange holdings, that really seemed to light the fuse. Traders interpreted the comments to mean gold would be favored over greenbacks. Some observers, however, see the report as part of a continuing thesis.

"This should not surprise," writes Tony Crescenzi, chief bond market strategist at Miller Tabak and a

RealMoney.com

contributor. "An ongoing theme worldwide has been the effort by central banks to diversify their reserve assets."

Economic statistics released earlier in the session included the Commerce Department reporting a lower-than-expected September trade deficit of $64.3 billion, compared with forecasts of $66 billion. August figures were revised downward to $69 billion from $69.9 billion. Separately, the Labor Department reported 308,000 first-time claims for unemployment insurance, lower than the forecast 318,000 and down from the revised 328,000 reported for the prior week.

The data presented a bit of a Rorschach test with analysts interpreting the data in a variety of ways.

"The likelihood, however, is that today's data will result in a downward adjustment to GDP," writes Randy Diamond, an analyst at Miller Tabak.

"We're going to be facing a larger trade deficit and that should put downward pressure on the dollar," says Peter Morici, economics professor at the University of Maryland Business School.

"I think what we have going on, is that the 'recession ship' is sinking," says Michael Darda, chief economist at MKM Partners in Greenwich Conn. "Claims surged the last week, and now they came back down. That's not indicative of a slowdown."

Typically, forecasts of a sluggish economy would result in expectations of a lower dollar. However, foreign-exchange dealers gave a mixed reaction, with the dollar moving up against the yen but down vs. the euro. The greenback was recently buying 117.905 yen vs. 117.80 yen late Wednesday, while the euro was trading at $1.2838 compared with $1.276. Over time, gold typically moves inversely to changes in the price of the dollar.

Darda adds that with the changes taking place in Congress and the White House, wider geopolitical tensions should be lowered. That will likely be bearish for gold, which is often purchased in times of war and turmoil.

On the technical-analysis side, chart watchers are unperturbed by the fall in gold prices earlier in the week.

"The fact that we closed above the 10-day moving average Wednesday gave traders the confidence that it was just a minor corrective action," says Dale Doelling, a market technician at Boynton Beach, Fla.-based Trends in Commodities. "I think $650 an ounce is the target most traders are looking at."

Among the miners, shares of

Iamgold

(IAG) - Get Report

were jumping about 4%, while those of

Goldcorp

(GG)

were ahead 7.8%.

Comex silver futures were also bouncing, with December-dated contracts soaring 50 cents to close at $13.05 an ounce. The silver ETF,

iShares Silver Trust

(SLV) - Get Report

, followed the metal price upward, higher by 4.6% recently.

Silver producer

Hecla Mining

(HL) - Get Report

reported third-quarter earnings of a penny a share, falling short of expectations of 6 cents, but up from a loss of 7 cents a share in the same period a year ago. Investors, however, were not impressed, and the stock was punished, off 5.9% recently.

Elsewhere, producers of the white metal were gaining, with shares of

Silver Wheaton

(SLW)

and

Coeur d'Alene Mines

(CDE) - Get Report

up 5.1% and 4% respectively in recent activity.

In base metals, December-dated Comex copper contracts rallied also, gaining 6.45 cents to close at $3.3075 a pound.