Gold Slumps Anew

Dollar strength and concerns about U.S. growth punish the precious metal.
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Updated from 12:32 p.m. EDT

Gold and metals fell sharply on Wednesday, erasing the previous day's gains, as the dollar strengthened and crude oil prices dropped.

Gold for June delivery plunged $36.20, or 5.4%, to $637.50 an ounce.

Gold, which acts as a hedge against inflation, received a lift Tuesday when crude oil neared $72 a barrel. But oil was losing ground Wednesday -- crude was recently down 66 cents at $71.10 -- after a report showed gasoline inventories rose last week, easing concerns of a shortage before the summer driving season.

Commodities were also hit after a weaker-than-expected report on U.S. durable goods orders revived concern over global growth while stronger-than-expected home sales renewed concerns about more

Fed

tightening.

Among other metals, silver for July delivery dropped 65 cents, or 5%, to $12.51 an ounce, and copper for July delivery lost 24 cents, or 6.3%, to $3.63 a pound.

Metals had rallied Tuesday, fueling hopes that the recent sharp correction seen in commodities was over. After surging to a 26-year high of $730 two weeks ago, gold had dropped nearly 13% to an intraday low of $636.80 on Monday.

But the precious metal then advanced to $673.70 on Tuesday, with silver and copper also recovering some ground after their respective 17% and 12% drops.

"It was normal to see a bounce yesterday after such a pullback ... attracted buyers with many people still bullish on the fundamentals

for metals," says Amaury Conti, metals stocks trader with San Antonio-based investment adviser Austin Calvert-Flavin. "But there is a tug of war between those long-term bulls and the short-term players."

Momentum players, such as hedge funds, are cautious that global central banks are lifting rates to curtail growth and inflation pressures, including from soaring commodities prices.

The

Federal Reserve

recently dashed hopes that it would soon pause its 23-month-long campaign to raise rates. "There is a lot of uncertainty about how much further the Fed will go, and whether they might have gone too far already," while other global central banks are also in a tightening mode, Conti says.

On Wednesday, news that U.S. durable goods orders unexpectedly dropped by 4.8% in April revived fears of an economic slowdown in the second half of 2006, which would hurt demand for industrial commodities.

At the same time, news that sales of new homes unexpectedly rose last month, fueled concern that the Fed would continue raising rates anyway.

The housing data boosted the dollar. A stronger greenback hurts the price of dollar-denominated commodities, such as gold, as it takes less of the currency to buy the same amount of gold.

The dollar, which had been dropping since the start of the year, has rebounded recently as the market reassesses expectations that the Fed will soon pause its rate hikes.

In recent action, the Dollar Index, which tracks the dollar against a basket of key currencies, was up 0.7%

Meanwhile, the shares of metal-mining companies were still sharply lower, tracking the action in the metals. The Philadelphia Gold and Silver index was recently down 5%, after dropping 3.6% earlier. The Amex Gold Bugs index was down 5.3% and the CBOE Gold index was down 5.5%.

Among the biggest decliners,

Meridian Gold

(MDG)

was down 8.3%,

Coeur D'Alene

(CDE) - Get Report

was down 6.9% and

Randgold

(GOLD) - Get Report

was down 6.3%.

Meanwhile shares of steel manufacturers were mostly lower after news that Brazil's

Companhia Vale do Rio Doce

(RIO) - Get Report

, the world's largest iron ore miner, said that China would have to pay the same 19% price hike agreed to by other iron-ore buyers.

Iron ore is the raw material used to make steel.

CVRD has already reached a similar agreement with Japanese steelmakers and with Germany's biggest steelmaker

Thyssen Krupp

.

China, which is CVRD's largest customer, has tried to negotiate a maximum price hike of 12.5% in iron ore prices for its local producers this year. But "they're likely going to have to eat this price increase," says Scott Burns, metals stocks analyst at MorningStar.

The world's top three iron-ore producers, including CVRD and

Mittal Steel

(MT) - Get Report

, control 85% of global production, constituting an oligopoly on iron ore, Burns says.

This is bad news for Chinese steelmakers, which will see their labor-cost advantage reduced by rising input costs. China might even curtail steel production, which would be another benefit for steel prices. Fear of Chinese overproduction had hit steel prices late last year.

For other steelmakers, the news should be mostly positive, according to Burns. "Steel producers set themselves as the toll gates between iron ore and buyers of steel," he says. "In a perfect world, this means that the higher costs will get passed down and steel prices will go up."

But some steelmakers that are net importers of their iron ore, such as Middletown, Ohio-based

AK Steel

(AKS) - Get Report

, might also feel the pinch. AK Steel was recently down 4.6%.

Charlotte, North Carolina-based

Nucor

(NUE) - Get Report

, meanwhile, uses scrap instead of iron ore, which means it might benefit from rising steel prices without paying more for the raw material. Nucor was recently up 0.6%.

Clear gainers would be the likes of Mittal,

U.S. Steel

(X) - Get Report

, and Brazil's

Companhia Siderurgica Nacional

(SID) - Get Report

, which all have long-term agreements for their own supply of iron ore. Yet, U.S. Steel was recently down 1.8% and CSN was down 6%.