Gold Rebounds from Lows

Commodities bounce as the dollar weakens after hakwish comments from the ECB.
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Updated from 12:25 p.m. EDT

Gold finished higher and other metals were off earlier lows Monday, reversing morning weakness as the dollar fell back and crude prices rose.

A sell-off in most commodities appeared poised to continue early Monday, as the dollar traded higher, continuing its recent rebound. A stronger dollar weakens the price of dollar-denominated commodities, such as gold, as it takes less of the currency to buy the same amount of gold.

But the dollar fell back after a European Central Bank official hinted at further hikes in interest rates in the eurozone. The euro was recently up 0.5% against the dollar, while the greenback was little changed against the yen.

"The dollar finally getting a bit weaker is putting somewhat of a floor under the price of metals," says Tom Hartmann, a metals analyst and broker at Altavest.

Crude oil, which had also fallen in the broad commodities sell-off, rebounded in early afternoon trade to add 37 cents to $68.90 a barrel. The gain also provided support for gold, which acts as a hedge against inflation.

By the close, gold for June delivery gained 20 cents to $657.70 an ounce, having fallen as low as $636.80 in early action. Gold has dropped over 10% since reaching a 26-year high of $730 two weeks ago.

Among other metals, silver for July delivery closed on a gain of 7 cents at $12.43 an ounce. Silver is down 17% since hitting a 25-year high of $14.93 two weeks ago. Copper for July delivery was little changed at $3.46 a pound. It's down 12% since its all-time high close at $3.93 last week.

"It's a positive signal," says Hartmann. "The talk about commodities

in the media has gone from a never-ending boom to saying 'it's all over now', signaling its might be time to start buying again."

But Hartmann says he wouldn't be surprised to see gold go back down towards $600 and trade sideways for a couple of months before its next rally.

The key challenge for metals and commodities right now is the same one that has rocked global financial markets -- from the Bombay Stock Exchange to Wall Street -- for the past week or so: Worries that central banks are raising interest rates to curtail growth and inflation pressures, most notably from soaring commodities prices.

This, in turn, has acted like a self-fulfilling prophecy for metals and commodities, according to Nell Sloane, metals analyst at NSFutures.com.

"Perhaps the most damaging outside influence is the fact that world equity markets are under pressure again," she writes. "That seems to foster a slower growth expectation, which in turn downplays inflation and undermines physical and investment demand for gold."

The dollar, which had been dropping since the start of the year, has rebounded recently

even if it weakened Monday as the market reassessed expectations that the

Federal Reserve

would soon pause its 23-month-long campaign to raise interest rates.

Now that markets expect the Fed to continue raising rates for a while longer, longer-term Treasury bonds -- which react to inflation expectations -- have been rallying on expectations that more rate hikes will curtail growth and inflation.

This has fueled a move out of the risky commodities market (and stocks) and into Treasury bonds, considered among the safest financial assets around.

In recent action, the price of the benchmark 10-year Treasury bond was up 8/32 in price while its yield, which moves inversely, was down to 5.02%.

Meanwhile, some are identifying a more global phenomenon behind the recent weakness in commodities. Easy money available over the past few years as global central banks kept rates at very low levels, is now harder to get.

The unwinding of the so-called "carry trade" is also behind concerns over emerging markets and commodities, which have been favored investment destinations for that easy money, according to Jeffrey Saut, investment strategist at Raymond James.

"Consider this, for the past few years 'hot money' has been borrowing money in Japan at effectively zero percent interest rates ... and bought anything that has been rising in value, namely stuff stocks, commodities and emerging markets," Saut writes.

But as the Japanese economy emerges from years of deflation, the Bank of Japan has signaled it intends to unwind its zero-rate policy, even if the process will likely take a while. At the same time, most Asian central banks are now raising interest rates, Saut notes.

"Is it any wonder emerging markets, commodities, and, consequently, 'stuff stocks' have taken a pounding recently as those hedge fund carry trades have been unwound?" Saut writes.

The strategist says he has no idea whether the current downtrend will continue for a few weeks or a few months, but he remains bullish on the supply/demand fundamentals supporting commodities.

Like Altavest's Hartmann, Saut says that the quickness with which the media have already called for the end of the "commodities bubble" is a contrarian sign indicating that more gains lie ahead.

"When you quit hearing the media using the words 'commodity bubble', then you should get worried, very worried," about commodities and associated stocks, he writes. "In the interim, the difference between perception and reality is where investors' opportunities lie."

Meanwhile, the shares of metal-mining companies were still sharply lower - but off earlier lows -- in recent action. The Philadelphia Gold and Silver index was down 2.6%, after dropping 3.6% earlier. The Amex Gold Bugs index was down 2.9% and the CBOE Gold index was down 2.8%.

Among the biggest decliners, South Africa's

Gold Fields

(GFI) - Get Report

was down 4.9%, after falling 7% in early action. Channel Islands-based

RandGold

(GOLD) - Get Report

was down 5% and Canada's

Eldorado Gold

(EGO) - Get Report

was down 4.3%

Meanwhile, the American Stock Exchange

announced the launch of the

Market Vectors-Gold Miners

(GDX) - Get Report

exchange-traded fund.

The new ETF will track the performance of the

Amex Gold Miners Index

. It is the first U.S. ETF offering investors exposure to gold-mining stocks, as opposed to the

streetTRACKS Gold

(GLD) - Get Report

and the

iShares Comex Gold Trust

(IAU) - Get Report

ETFs, which just track the metal itself.