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Gold Rests on Trek to $600

The metal follows oil prices lower, but mining shares are strong, as is the price of copper.
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Updated from 5:03 p.m. EDT

After a big run to 25-year highs on Monday, gold took a breather Tuesday. The precious metal again took its cues from crude oil, which dipped a day ahead of U.S. data on crude inventories.

Gold for June delivery slipped $3.70, or 0.6%, to $590.60. On Monday, gold climbed to a 25-year high of $596.80 as the price of crude oil flirted with the $68-per-barrel level amid jitters over Iran's testing of underwater missiles in the Persian Gulf.

"People expected a pullback today and we got it," says Brien Lundin, editor of

Gold Newsletter

. "But it wasn't as bad as people feared and this shows underlying strength in the market."

Lundin says the overall positive action in gold-mining shares Tuesday is a good indication of underlying sentiment and bodes well for a test of the $600 level in the coming days, if not Wednesday. The Philadelphia gold and silver index gained 0.8%, the Amex Gold Bugs index rose 0.9% and the CBOE Gold index advanced 0.7%.

Silver, which has been trading in tandem with gold as of late, also dropped, losing 3.5 cents to $11.73. Silver recently hit a 22-year high amid buying ahead of the expected launch of a silver exchange-traded fund (ETF). The fund, much like the

streetTRACKS Gold


ETF, should make investing in the commodity easier for retail investors.

Crude for May delivery lost 51 cents to $66.23 a barrel. Oil -- and gold -- lost some steam early Tuesday as Iran indicated it would be willing to negotiate with the international community about plans to enrich uranium on a large scale, according to Nell Sloane, gold analyst at

This "served to undercut gold this morning from the inflation and flight-to-quality perspective," she wrote in her daily commentary.

Gold serves as a hedge against inflation and is also considered a safe-haven asset in times of geopolitical instability.

Still, the precious metal's impressive run since it charged through the $500 level late last year has many wondering if much more upside is possible, especially in the short to medium term. While the $600 level seems within reach, some experts say that jewelry demand will likely be affected at current levels, which would ultimately pressure the price of gold.

That's the verdict of London-based Virtual Metals Research, which released its semiannual "Yellow Book" on Monday. The firm expects jewelry demand, which accounts for about 75% of overall market for gold, to drop by 21% this year because of the currently high prices.

The Price of Demand

Strained demand, meanwhile, should pull down the price of gold toward levels where demand is still strong, which is around the $520 to $540 level, according to Jessica Cross, the CEO of Virtual Metals.

But the longer gold stays above $580, the range where demand can be sustained will rise accordingly as buyers get accustomed to the higher levels. "It's a moving target," Cross says.

Other supporting factors for the price of gold, such as talk of China buying the precious metal to diversify its massive dollar holdings, have been overstated, the Virtual Metals team says.

"We have spoken to

officials from the People's Bank of China who've told us they wouldn't want to disrupt the market," Cross says.

China has said repeatedly -- and again on Tuesday -- that it would seek to diversify its dollar holdings, and has suggested it would step up its purchases of gold. But the PBOC wants to avoid disrupting either the gold or the foreign exchange markets, as this would hurt its existing holdings, Cross says.

In spite of the bearish picture for jewelry demand, Cross believes that gold could still end 2006 at much higher levels thanks to hedge fund and pension fund demand, including via existing gold ETFs. Similarly focused ETFs designed for investors in India and the Middle East could spur even more demand.

Gold bugs, meanwhile, continue to point toward the metal's bullish fundamental underpinning.

Amid global economic imbalances -- mainly the soaring U.S. current-account deficit -- gold is increasingly seen as a hedge against what many expect to be an overdue decline in the dollar. (On Tuesday the greenback fell vs. the euro and yen after a Chinese official said China would be able to reduce its holdings of U.S. debt.)

Gold bugs also believe that since official inflation measures -- such as the U.S. core consumer price index -- don't take into account the elevated price of energy and other commodities, the rising price of gold is a reflection of the true inflationary environment.

Many economists point out that inflation has been held in check thanks to cheap products and labor from Asia. But according to TJ Bond, a Hong Kong-based economist with Merrill Lynch, global inflationary pressures are rising from Asia itself, and especially in China.

With Asia's emerging economies -- China, India, Indonesia and Pakistan -- adding 33 million people (the equivalent or four cities the size of New York) to their cities every year, Bond says that construction, infrastructure and consumer spending are on an impressive uptrend throughout the region.

The strains on local and global resources from this trend are inflationary for the region and the world, he wrote in a recent note.

Expectations for solid global growth also provided support for gold on Tuesday, according to NSF's Sloane. The International Monetary Fund raised its 2006 global economic growth forecast to 4.9% from 4.3% previously. At the same time, the IMF raised its forecasts of Chinese growth to 9.5% vs. 9.0% previously.

Along with gold, copper seemed to receive a bid from the raised forecasts on Tuesday, says Sloane. Copper rose 7.5 cents, or 0.3%, to $2.555 a pound.

Meanwhile, the stocks of gold and silver miners were overall shining brighter than the metals.

RandGold Resources


gained another 5.8% after rising 4.3% Monday when it reported 2005 profits were double those for 2004.

Bema Gold


gained 2.2% after receiving approval to start construction at the Kupol gold and silver mine in Russia.

After a big advance in the past few weeks, however, some weakness was seen in the likes of

Meridian Gold



Harmony Gold



Gold Fields