Gold Lifts as the Dollar Slides

The recent rally continues but traders worry about the lack of physical buyers.
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Updated from 11:49 a.m. EST

Gold prices eased Friday, after a week of frenetic trading.

After rallying to an intraday high of $655.50 an ounce, prices for February-dated bullion futures backtracked to close down $2.30 at $650.60 on the Comex division of the New York Mercantile Exchange. The exchange-traded funds, which hold the metal, were down also with

streetTracks Gold Shares

(GLD) - Get Report

and

iShares Comex Gold Trust

(IAU) - Get Report

both 0.4% lower recently.

The late-day dip came despite further weakness in the dollar, the primary driver of a rally which has lifted spot prices for the yellow metal from about $568 an ounce on Oct. 5 to current levels. The value of bullion tends to move in the opposite direction to changes in the price of the U.S. currency.

The euro was recently trading at $1.3315, a fresh 20-month high and up from $1.3244 late Thursday. The dollar was also losing against the yen, with one dollar buying 115.293 yen, vs. 115.75 yen previously.

Friday's dollar decline was in part brought on by a weak Institute for Supply Management index, which fell to 49.5 in November, vs. consensus expectations of 52 and an October reading of 51.2. The fall suggests contraction in the manufacturing sector.

Elsewhere, the Economic Cycle Research Institute provided a strangely bright note, on the back of a week of dour data. The ECRI's Weekly Leading Index logged a 1.5% uptick for the period ending November 24, marking the fourth-straight week of increases. The indicator rose 1.4% in the prior increase.

Although a string of four data points is hardly conclusive, sustained increases in the WLI could point to a stronger economy in 2007, which may reverse the dollar's decline.

Back in the futures trading pits, at least one observer seems concerned that the dollar-driven surge in bullion hasn't induced some of gold's traditional buyers to participate.

The climb "was almost entirely dollar-induced," writes Jon Nadler, an analyst at Montreal-based bullion dealer, Kitco. "We still wish we had seen added bullishness on the part of jewelry buyers and private investors as a component of this rally."

On the technical analysis side, Pasedena Calif.-based MarketVane says the Bullish Consensus for gold rose to 69% bullish from 66% earlier in the week. That's a hair below overbought territory, which starts at 70%.

"It's not extremely overbought and with the uptrend being somewhat stable that's positive for the longer term," says Rich Ishida, president of MarketVane. He adds that the pattern of higher highs and higher lows is positive for a continued upward trend.

Ishida says the next resistance level is at $675, and says the price could hit $700 by year-end.

Among the miners,

Freeport McMoRan Copper & Gold

(FCX) - Get Report

received a nod from technical analyst John Roque at Natexis Bleichroeder in New York. He's targeting a $97 a share, vs. the current price of about $61.

Roque notes that momentum is accelerating, but Freeport's stock, recently off 1.7%, is "not overbought" yet.

The weaker bullion price was weighing down on the Philadelphia Gold and Silver Index, recently off 1.3%.

In base metals, March delivery copper contracts eased off, closing down 2.35 cents at $3.172 a pound on the Comex.