Gold Rallies Ahead of Bernanke

Renewed concern about Iran and a falling dollar aid the metal but the Fed chairman sends a shot across inflation's bow.
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Updated from 11:35 a.m. EDT

Gold advanced Monday as the dollar weakened and oil prices rose as tensions again mounted over Iran's nuclear ambitions. But the gains came prior to a surprisingly hawkish speech by

Federal Reserve

chairman Ben Bernanke, which will likely have negative ramifications for commodities trading on Tuesday.

On Monday, gold for August delivery gained $7.70, or 1.2%, to close at $647 an ounce in NYMEX trading. Among other metals, silver for July delivery rose 21 cents, or 1.74%, to $12.29 an ounce.

Shortly after the 1:45 p.m. close of NYMEX gold futures trading, Bernanke said that inflation remained at or above his preferred range, reviving expectations of a June rate hike.

There is a strong consensus among the members of the Federal Open Market Committee that maintaining low and stable inflation is essential for achieving both parts of the dual mandate assigned to the Federal Reserve by the Congress," Bernanke said in a speech at the International Monetary Conference in Washington, D.C.. "In particular, the evidence of recent decades, both from the United States and other countries, supports the conclusion that an environment of price stability promotes maximum sustainable growth in employment and output and a more stable real economy. Therefore, the Committee will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.

In reaction, market odds of a June hike jumped to 64% from 50% earlier Monday and stocks tumbled. Following Bernanke's comments, the dollar rose to 112.06 yen, bouncing back from 111.67 yen in morning trade, while the euro fell to $1.2923 from a morning high of $1.2979.

Gold, which acts as both a hedge against inflation and as a safe haven asset, received an early lift Monday as crude rose amid Iranian threats to cut crude oil production. Gold's surge to a 26-year high of $730 an ounce last month was helped by oil nearing $75 a barrel as tensions mounted with Iran, the world's fourth-largest producer of crude.

Crude oil for July delivery was recently up 7 cents at $72.40 after earlier rising as high as $73.84.

Iran's religious leader Ayatollah Ali Khamenei said Monday that Iran might cut off its supplies of crude should the U.S. make the "wrong move," according to the

BBC

.

On Friday, Iranian president Mahmoud Ahmadinejad said Tehran would not abandon nuclear research under Western pressure. The declaration comes after six world powers issued new proposals aimed at convincing Tehran to stop nuclear enrichment.

The U.S., which had previously hinted that Tehran might face economic sanctions or military action if it didn't stop nuclear research, had joined U.N. Security Council members last week in trying the diplomatic route. But Secretary of State Condoleezza Rice said that talks would only be held on the precondition that Tehran stop nuclear enrichment.

The gold market has "recaptured part of its geopolitical turmoil premium," writes Jon Nadler, investment products analyst at bullion dealer Kitco. That premium had receded in recent weeks as efforts at negotiations were perceived by the market as progress on the Iranian nuclear issue, he says.

Gold and metals were also supported by further dollar weakness early in the day. A weaker greenback boosts the price of dollar-denominated commodities, such as gold, as it takes more of the currency to buy the same amount of gold.

Gold in particular has benefited from expectations that the dollar will resume a multiyear decline once the

Federal Reserve

stops raising interest rates. These expectations were frustrated last month amid stronger-than-expected inflation data and hawkish comments from Fed officials.

Friday's weaker-than-expected May U.S. employment report again revived hopes that the Fed would pause in June, even if the unemployment rate fell to 4.6%. A slightly stronger-than-expected May reading from the service sector of the economy did little to change those hopes early Monday, although Bernanke's speech certainly did.

Weakness & Volatility

Commodities and global financial markets have experienced weakness and volatility since last month amid concern that central banks are raising interest rates to curb growth and inflation pressures, notably from soaring commodities prices.

A slowing economy may not spell good news, especially for the more industrial metals, such as copper, which led a

metals meltdown early last week.

On Monday, however, copper recovered from early losses, with the July contract ending up 1.4 cents, or 0.4%, at $3.60 a pound.

Freeport-McMoRan Copper & Gold

(FCX) - Get Report

warned that copper production at its huge Indonesian mine will be 16% below previous forecasts in the second quarter because of unusual amounts of clay found in its current mining area. In recent action, Freeport was recently down 5.8%.

Among other copper producers,

Phelps Dodge

(PD) - Get Report

was down 2.9% and

BHP Billiton

(BHP) - Get Report

was down 1.7%.

Meanwhile, miners with stakes in Peru, South America's largest gold producer, mostly advanced after center-left candidate Alan Garcia won Peru's presidential elections on Sunday. Garcia defeated nationalist Ollanta Humala, who said he was for the nationalization of Peru's assets, including mines.

Among major players in Peru,

Newmont Mining

(NEM) - Get Report

was up 0.9% and

Barrick Gold

(ABX)

was up 0.5%.

Many observers note that commodities, especially metals, had undergone an unsustainable speculative surge in price since the beginning of 2006. Gold had gained over 40%, silver had rallied 65%, and copper had more than doubled by mid-May. But since then, gold has fallen nearly 12%, silver is down 14% and copper is down 13%.

On Monday, Citigroup analyst John Hill hiked his 2006 gold price forecast to $632 from $553 previously. He also hiked his 2007 forecast to $700 from $560, and his 2008 forecast to $750 from $580.

He says the recent correction has to be put in the context of the past two years, during which gold had 10 corrections of over 5%. Hill says seasonal patterns should keep gold prices contained for the next few months, but that prices should rally in the late summer/early fall, when jewelry demand picks up, while selling from central banks subsides.

Overall, shares of metals miners erased early gains to turn mostly lower after Bernanke's comments. The Philadelphia Gold and Silver index was recently up 0.1%, while the Amex Gold Bugs index was down 0.4% and the CBOE Gold index was down 0.3%.

Agnico-Eagle Mines

(AEM) - Get Report

was recently down 2.4% after announcing it plans to spend $135 million to build a gold mine in northern Finland. The Toronto, Canada-based company also said it plans a $250 million equity offering to help finance new investments in several projects.

Among the biggest gainers,

Randgold

(GOLD) - Get Report

was up 2.7%,

Harmony Gold

(HMY) - Get Report

was up 2.6% and

IamGold

(IAG) - Get Report

was up 2%.

The newly launched

Market Vectors-Gold Miners

(GDX) - Get Report

exchange-traded fund, which tracks the performance of the Amex Gold Miners Index, was up 0.08%.

ETFs tracking the metals themselves were rising. The

iShares Silver Trust

(SLV) - Get Report

was up 1%, and the

StreetTRACKS Gold Trust

(GLD) - Get Report

was up 0.8%.