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Gold Slips Despite Core PPI Rise

Weak industrial production overshadows the surprisingly strong inflation report.

Updated from 1:57 p.m. EDT

The threat of inflation from rising producer prices failed to ignite the gold market Tuesday as declining output figures took center stage.

The Department of Labor published data showing that the producer price index fell 1.3% in September vs. a forecasted dip of 0.7%, as plunging gasoline costs provided relief. The core rate, however, provided more troubling news, showing a 0.6% jump, or six times the 0.1% level that investors had been expecting.

Also out Tuesday, the

Federal Reserve

estimates that industrial production fell 0.6% during the month, compared with a forecasted gain of 0.1%. Many investors will have taken the industrial production data -- as well as weaker-than-expected capacity utilization -- as indicative of declining inflationary pressures going forward. Not all agree, however.

"We continue to view the outlook for core inflation as more problematic," notes Michael Darda, chief economist at Greenwich, Conn.-based MKM Partners. Darda, long an inflation hawk, says that lower energy costs are providing only a "temporary dividend" to headline inflation and that he remains concerned about the threat of rising prices.

"Unit labor costs are advancing at a pace that signal either significant margin compression or higher underlying

core inflation," Darda writes.

Gold, which is often considered a hedge against inflation, failed to rise; instead, contracts for December delivery of the yellow metal closed down $5 at $593.50 an ounce on the Comex division of the New York Mercantile Exchange. The exchange-traded funds,

streetTracks Gold Shares

(GLD) - Get SPDR Gold Trust Report

and

iShares Comex Gold Trust

(IAU) - Get iShares Gold Trust Report

, followed the futures prices lower, each shedding about 1% recently.

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Chart-watchers note that gold seems to have been stuck in a downward sloping channel since the summer -- and notably it bounced off resistance in the upper band Monday in the high $590s. The bottom side of the channel provides likely support at under $560.

But they add that some broader technical indicators look less clear.

The bullish consensus is currently at 59% bullish, says Rich Ishida, president of Pasadena, Calif.-based Market Vane, which publishes the bullish consensus indicator. He notes that the index hit a 24-month low of 52% last week. "As long as it stays above 52%, then that is a positive."

Ishida warns that longer-term bulls might want to wait until falling gold prices find support, which he sees at around $563 an ounce.

Major gold producer

Freeport-McMoRan Copper & Gold

(FCX) - Get Freeport-McMoRan, Inc. (FCX) Report

reported third-quarter earnings of $1.67 a share, besting Street estimates of $1.59. The company earned 86 cents a share in the same period a year ago. The stellar results weren't enough to boost the shares, however, which were recently falling about 1% because of the soft price of gold.

Among the other miners,

Golden Star Resources

(GSS) - Get Golden Star Resources Ltd. Report

was falling for a second straight day, off 3.6% recently. Also losing significantly in the gold patch were shares of

Randgold Resources

(GOLD) - Get Barrick Gold Corporation Report

, lower by 2.1%, and

Meridian Gold

(MDG)

, down 3.1%.

In the base metals, copper closed down 8.5 cents at $3.496 an pound. The drop notwithstanding, observers remain optimistic.

"Overall, we feel another up leg is getting under way for the base metals," says William Adams, an analyst at

Basemetals.com

in London. "Although we think all the metals may run higher, we think some offer better value than others, particularly copper and zinc, in the short to medium term."