Gold Snaps Losing Streak

Weak CPI helps the metal rebound from recent weakness. Plus, more on the Inco sweepstakes.
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Updated from 11:38 a.m. EDT

Gold snapped its four-session losing streak Wednesday as favorable inflation news reduced the chances of another

Federal Reserve

rate hike.

The Labor Department released data showing the prices for goods and services grew only 0.4% during July, and the core rate, which excludes food and energy, was up 0.2%, both in line with expectations.

Prices for December delivery of the yellow metal closed up $6.10 at $639 an ounce in trading on the Comex division of the New York Mercantile Exchange (Nymex). Notably, bullion prices didn't track those of crude, as has been the case of late. Spot prices for oil were recently shedding 90 cents at $72.15 a barrel, also on the Nymex.

The gold bullion exchange traded funds,

iShares Comex Gold Trust

(IAU) - Get Report

and

streetTracks Gold Shares

(GLD) - Get Report

, were tracking the futures prices, recently gaining 0.8% and 0.6%, respectively.

The benign CPI data suggest that the Fed won't likely raise rates again soon because increases in the general price level look restrained. However, the gold market's reaction indicates that some participants see burgeoning inflation in the works. Investors frequently buy gold as a store of value during inflationary periods.

"I don't see a slowdown, and even if there is, there is zero evidence that would lead to lower inflation," says Michael Darda, chief economist at MKM Partners. "I think the market is telling us that there are more inflationary pressures to come down the road."

Darda points to a robust labor market, rising unit labor costs and accelerating rents in the housing sector as evidence of inflationary undercurrents.

Other gold news shows that the European Central Bank sold 32 million euros' worth of gold (approximately equivalent to two tons of bullion at current prices), in the week to August 11, according to data published Tuesday.

That leaves the European Union's main monetary authority with more than 160 tons of gold sales available before the end of September, according to Matthew Turner of London's Virtual metals. Dumping that much gold on the market over a period of approximately weeks could weigh heavily on the market, he notes.

Turner, however, says the ECB member banks might be waiting for higher prices before they offload their gold holdings. He recalls that the Bank of England sold almost half its bullion holdings around 1999 and 2000, receiving approximately $300 an ounce, a relatively poor price.

"I think nobody wants to be the next Bank of England," says Turner although he acknowledges trying to get inside the mind of central bankers is tricky.

Also hitting the market was news that investment demand for gold jumped 75% in value terms in the second quarter of 2006 to $2.6 billion compared to $1.5 billion during the same period a year ago, according to the World Gold Council (WGC). When measured by weight, however, investment demand only grew 19% to 130 tons, from 109 a year ago, with skyrocketing prices (up 47% year-on-year to an average of $628 vs. $427) accounting for the difference.

Sales of gold for use in jewelry demand, however, grew only $11.4 billion vs. $10.2 billion, up 12%, according to the WGC report, published before the opening bell. Or in weight terms a decline of 24% to 563 tons from 739 tons, as high prices reduced consumers' buying power.

"When you have the kind of price moves we've had recently that's a deterrent and you see the dampening in the jewelry trade," says Neal Ryan, an analyst at Blanchard, a New Orleans-based gold bullion and coin dealer. "But we definitely see a boost in investment demand," noting a strong tendency for some investors to chase performance.

The session saw miners rally with the metal as well as the broader indices. Big gainers included

AngloGold Ashanti

(AU) - Get Report

, up almost 3%,

BHP

(BHP) - Get Report

, gaining 2.8%, and

Rio Tinto

(RTP)

rallying 3.2%. The

Dow Jones Industrial Average

was recently gaining 90 points at 11,320.

In base metals, Canadian zinc miner

Teck Cominco

(TCK)

said it would not follow through with a proposed equity offering linked to its acquisition of nickel miner

Inco

(N)

that it announced Tuesday afternoon.

Teck was planning to use the additional cash raised to sweeten its bid for Inco, which is being challenged by two rival offers, one from U.S. copper producer

Phelps Dodge

(PD) - Get Report

and the other from Brazilian giant

Companhia Vale do Rio Doce

(RIO) - Get Report

.

Teck now says its bid will expire at midnight Wednesday, as previously planned.

Shares of Teck were rallying on the news, recently up 3.5%, CVRD shares were rallying 2.1%, while those of Inco were falling 2.8%, and those of Phelps were off 0.3% in recent action.

It hasn't just been the nickel patch that's hot; the metal itself has also been on fire. Trading on the London Metal Exchange (LME) saw prices for the benchmark 3-month nickel contract hit new all time highs of $29,200 a ton, up 6.5%, says Edward Meir of commodity brokers Man Financial.

Meir notes that although LME stocks of nickel rose to 6,162 tons, a large portion of the metal (4,788 tons) has cancelled warrant status, meaning it can't be used to fulfill a contract, thus forcing spot prices up even further. Buyers wanting metal delivered immediately saw prices reach $33,500 a ton on the LME, according to Basemetals.com.

Elsewhere in base metals, prices for the benchmark December copper contract lost 6.25 cents to close at $3.43 a pound in trading on the Comex as hopes rose that the strike at Chile's Escondida copper mine could be resolved soon.