Gold Keeps Shining

Whether inflation is tame or strong, the precious metal finds a reason to rally.
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Updated from 12:45 p.m. EDT

Inflation or no inflation, the bull run in gold and metals keeps on finding fuel to advance. Whereas Tuesday's tame U.S. producer prices data boosted gold because it caused a drop in the dollar, stronger-than-expected March consumer prices on Wednesday revived the theme of gold as an inflation hedge.

The inflation theme also remains alive and well with crude oil prices still at record levels. Crude oil first first dropped on profit-taking Wednesday, but it made a comeback as the market digested weekly data showing that U.S. gasoline inventories dropped for the seventh week in a row.

Crude oil finished up 55 cents at $71.90 a barrel. The price of a barrel has been propelled above $70 amid rising tensions over Iran's nuclear ambitions.

Gold, which has been tracking crude pretty closely, nonetheless traded higher in morning action, as the March consumer price index fanned inflation jitters. With crude prices turning higher, gold received another jolt and finished up $12.70 at $636 per ounce, another 25-year high.

Among other metals, silver jumped 71 cents to $14.49 an ounce, just off a 22-year high of $14.57 earlier. Copper, however, dropped $1.15 to $2.95 a pound -- after hitting an all-time high of $2.99 -- following bearish supply news. The London Metal Exchange reported that copper stockpiles had increased 7% on Wednesday.

The CPI advanced 0.4% in March vs. an expected 0.3% rise, but the core number, excluding food and energy, really caught the market's attention. Core inflation increased 0.3% last month vs. expectations for a 0.2% gain, mostly the result of a slowing housing market that boosted rental costs to their highest levels in over four years.

The report contrasted with Tuesday's March PPI, which showed that core inflation at the production level remained a tame 0.1%.

But "it's all about the consumer, and, any way you cut it, inflation was not well contained in March," writes Joel Naroff, president of Naroff Economic Advisors.

Market measures of inflation expectations shot higher after the CPI. Most visibly, the yield of a benchmark 10-year Treasury bond moved back above the 5% mark. In recent action, the bond was losing 11/32 in price while its yield, which moves inversely to price, advanced to 5.03%.

Market measures of inflation expectations shot higher after the CPI. Most visibly, the yield of a benchmark 10-year Treasury bond moved back above the 5% mark. The bond lost 11/32 in price, while its yield, which moves inversely to price, advanced to 5.03%.

And, of course, gold -- which new

Federal Reserve

Chairman Ben Bernanke says he uses as one of several inflation gauges -- keeps advancing.

Both the precious metal and metals miners' stocks also received a lift after bullish forecasts from Goldman Sachs. Metals analyst Oscar Cabrera raised his price forecast for gold to $600 an ounce from $550 for 2006 and to $650 from $575 for 2007.

"Strong gold fundamentals should continue in 2006, with a structurally weaker dollar and inflationary pressures providing upside potential to

earnings estimates in

the second half of 2006," Cabrera wrote in a note to clients.

Gold bugs believe that a slowdown in the U.S. economy later this year will force the Fed to stop raising rates, and that would lead to dollar weakness. A weak dollar is bullish for the price of most dollar-denominated commodities, such as gold.

On Wednesday, the dollar first got a respite as the stronger-than-expected CPI boosted expectations that the Fed will raise interest rates two more times.

According to Tony Crescenzi, interest rate strategist at Miller Tabak and a

RealMoney

contributor, the Fed must be careful about ending its rate hikes too soon. "For example, ending the hikes whilst commodity prices are surging and before the economy has shown signs it is set to slow

... would likely worsen inflation expectations," he writes.

But the greenback reversed earlier gains after more power shuffle at the White House revived speculation that Treasury Secretary John Snow, who supports a strong dollar, would resign. Scott McClellan, the White House press secretary, announced Wednesday he would step down. At the same time, White House advisor Karl Rove will now focus on the upcoming Congressional mid-term elections, according to published reports.

The dollar suffered another blow after comments from San Francisco Fed president Janet Yellen.

Speaking on

CNBC

Wednesday, Yellen -- who votes on rates this year -- said that from her perspective, the surge in gold and commodities was more reflective of strong growth globally than of rising inflation expectations. Supply constraints and political uncertainty also play a role, she added.

She might be right. But the current bull-run in gold and other metals seems poised to continue feeding on anything that comes its way, be it expectations of a weakening dollar, geopolitical jitters or soaring energy costs. This bull-run might even feed on itself, viewing the rising price of gold as evidence of rising inflation.

The stocks of metals miners continued to advance. The Philadelphia Gold and Silver index recently was recently up 3.3%, the Amex Gold Bugs index was up 3.8%, and the CBOE Gold index advanced 3.4%.

Amongst the biggest gainers, Canada's

IamGold

(IAG) - Get Report

was recently up 7.2%, South Africa's

Harmony Gold

(HMY) - Get Report

was up 6.4%, and Littleton, Colorado-based

Golden Star Resources

(GSS) - Get Report

was up 5.2%.

Newmont Mining

(NEM) - Get Report

, which is expected to report earnings on Thursday, was recently up 2.3% at $56.94.

Goldman's Cabrera expects the Denver-based company to post first-quarter earnings of 33 cents per share, compared with the Thomson Financial consensus forecast of 32 cents.