Gold Lifts as Dollar Dips

A sense the Fed is done tightening weighs on the greenback and gives metals a modest upswing.
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Updated from 11:26 a.m. EDT

A weaker greenback helped push gold higher Thursday, despite some early-session concern over central-bank selling and hedge fund liquidation.

"The dollar weakness is due to the new reality that the

Fed

is very likely done raising interest rates," says Randy Diamond, an analyst at New York-based Miller Tabak.

Foreign-exchange investors tend to switch into currencies where expected returns are higher. With the next move in U.S. short-term interest rates likely to be lower, traders will likely be selling dollars in favor of yen and euros.

The dollar was buying 116.38 yen, down from 117.45 yen late Wednesday, and was also losing against the euro, which was recently trading at $1.2786 vs. $1.2687 late Wednesday. The price of gold bullion tends to move inversely with the changes in the U.S. dollar.

In response to the currency movement, contracts for December delivery of gold closed up $2.10 to $588.50 an ounce on the Comex division of the New York Mercantile Exchange.

Earlier in the session, worries about central-bank sales were weighing heavily on sentiment, and this may continue to moderate any spikes for at least a few more days.

"The market's got its knickers in a twist about whether it's going to have to absorb more heavy sales from the signatories to the second Central Bank Gold Agreement," says Rhona O'Connell, an analyst with GFMS Analytics in London. "Whether they are or whether they aren't, it's the perception that is important."

The European Central Bank sold about 499 million euros worth of gold last week, or about 34 tons of gold, and concern remains that more could be coming soon.

Also dampening the mood was Amaranth, which was reported earlier this week to have lost $4 billion while trading in volatile natural gas futures.

"A news story like that is going to cause someone to stop and think," says Bernard Hunter, director of precious metals in Toronto for bullion bank ScotiaMocatta. "It surely must have an impact on your decision on whether to invest in commodities."

Hunter adds that he is seeing increased physical buying of bullion, which is helping support the price level, although investors are quickly developing lower expectations about prices.

The exchange-traded funds that hold gold,

streetTRACKS Gold Shares

(GLD) - Get Report

and

iShares Comex Gold Trust

(IAU) - Get Report

, were moving in line with the metal.

Not all market participants have been shaken by the recent decline, which has seen spot prices drop about 14% since July 17.

"It's interesting that we are seeing demand increase as the price drops,"says Alex Edwards, chief operating officer at BullionVault.com, who adds that business is up 30% in value terms in September compared with August despite the recent selloff.

Elsewhere in precious metals, HSBC Securities initiated coverage of

Glamis Gold

(GLG) - Get Report

and

Goldcorp

(GG)

with underweight and neutral ratings, respectively.

Shares of Glamis were rising 1.6%, while those of Goldcorp were lifting 1.4%, in recent trading.

In base metals, Comex December copper futures reversed early session weakness to close up 5.6 cents at $3.435 a pound.

Deutsche Bank Securities was speculating on a possible merger between copper miners

Phelps Dodge

(PD) - Get Report

and

Southern Copper

(PCU)

.

"The logic of a ... combo appears compelling, as we calculate it could prove EPS accretive for both acquirer and target company under stock, debt or mixed financing," a research note from the bank states.

Southern Copper was recently climbing 1.1%, while Phelps was jumping 3.8%.

Shares of U.K.-based diversified miner

Anglo American

(AAUK)

were rallying 4%, likely benefiting from a stronger pound, which was recently trading at $1.8983 vs. $1.8878 late Wednesday.