Gold Up, But Off Highs

The metal rises as the greenback suffers after Henry Paulson is named Treasury Secretary.
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Updated from 12:17 p.m. EDT

Gold advanced on Tuesday, boosted by weakness in the dollar and rising crude oil prices. But the precious metal finished well off early highs, while copper dropped, as concerns over U.S. economic growth spread on Wall Street.

Gold for July delivery finished up $2.9, or 0.4%, at $653.90 an ounce, after rising as high as $664.50 in early action.

Among other metals, silver for July delivery gained 34 cents to $13.07 an ounce, while copper for July delivery fell 14 cents to $3.67 a pound.

"There's still a bullish story behind commodities as a whole, but it's more so in the precious metals than in the industrial metals," says Amaury Conti, gold analyst and broker with San Antonio, Texas-based investment advisor Austin Calvert-Flavin.

Worries about rising interest rates and global growth are casting a shadow over metals that are most closely linked with the economy, he says. Similar worries have fueled volatility in emerging markets and on Wall Street recently.

Gold, which acts as a hedge against inflation, received an early lift Tuesday as crude oil again topped $72 a barrel. In recent action, oil was adding 78 cents to $72.12 a barrel as new jitters over Iran's nuclear ambitions fueled supply concerns from the world's fourth-largest producer of crude.

Gold, which also serves as a safe haven amid geopolitical concerns, had benefited from rising tensions with Iran since the start of 2006. On Tuesday, Iran's foreign ministry spokesman said Tehran was pursuing nuclear enrichment activities, despite Western requests to stop it.

But the bigger factor supporting gold and metals Tuesday was a weak dollar. A weaker greenback boosts the value of dollar-denominated commodities, such as gold, as it takes more of the currency to buy the same amount of gold.

The Dollar Index, which tracks the greenback against a basket of key currencies, was recently down 1.3%.

The dollar remained weak after President Bush appointed

Goldman Sachs

(GS) - Get Report

CEO Henry Paulson as his new Treasury Secretary.

Paulson is expected to continue the Bush Administration's endorsement of a weaker dollar, according to Brien Lundin, gold analyst with Jefferson Financial. "The Bush administration has pretty much acquiesced to a weaker dollar to support the economy in the face of rising interest rates," he says. "In addition to geopolitical tensions, the anticipation of dollar weakness has been the major factor of support for gold this year."

Adding to dollar weakness on Tuesday was news of a drop in U.S. consumer confidence, as measured by the Conference Board. The greenback was already on a downward path vs. the euro and the yen after eurozone and Japanese economic data boosted expectations that rates will move higher in both regions.

The dollar has been a downward path since late last year amid expectations that the

Federal Reserve

would stop a campaign to raise interest rates begun in June 2004. But the dollar strengthened in recent weeks as stronger-than-expected inflation data and Fed officials convinced the market that the Fed would hike rates again in June.

Simultaneously, metals and commodities have fallen sharply amid concerns that global central banks are lifting interest rates to curb growth and fight inflation pressures, notably from soaring commodities prices.

The pullback had taken down the price of gold nearly $100, or 14%, from a 26-year high of $730. Besides fundamental concerns about the global economy, many observers believed the correction helped to remove some of the excess speculation in a market that had become red hot.

"While worries about the sustainability of demand and the fear of higher rates are still in the market, investors are starting to reevaluate the fundamentals again, in what is now a less frothy and hurried environment," writes Bart Melek, senior economist at BMO Nesbitt Burns.

But many gold and metals observers believe that volatility will likely persist until the Fed's next rate-setting at the end of June. A number of key U.S. economic reports comes out this week, culminating with the May employment report on Friday, and is likely to keep the market on edge.

Meanwhile, shares of metals miners were mixed in recent action. The Philadelphia Gold and Silver index was down 0.3%, while the Amex Gold Bugs index was up 0.3% and the CBOE Gold index was up 0.06%.

Freeport McMoRan

(FCX) - Get Report

was recently down 2.4%, even after RBC Capital upgraded the stock to outperform from sector perform.

Among the biggest gainers,

Eldorado Gold

(EGO) - Get Report

was advancing 6.9%.

Golden Star Resources

(GSS) - Get Report

was up 2.4% after announcing it was making "good progress" in the expansion of its Bogoso, Ghana sulfide project.

The newly launched

Market Vectors-Gold Miners

(GDX) - Get Report

exchange-traded fund, which tracks the performance of the

Amex Gold Miners Index

, was up 0.4%.

Meanwhile, ETFs tracking the metals themselves were posting stronger gains. The

iShares Silver Trust

(SLV) - Get Report

was up 3.6%, and the

StreetTRACKS Gold Trust

(GLD) - Get Report

was gaining 0.6%.