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Speculation Perks Up Gold

Contracts for April delivery add $3.70 to close at $686.70 an ounce.

Updated from 2:21 p.m. EST

Gold moved marginally higher Friday as speculators continued to increase their futures holdings.

Contracts for April delivery added $3.70 to close at $686.70 an ounce on the Comex division of the New York Mercantile Exchange. The

DB PowerShares Gold

(DGL) - Get Invesco DB Gold Fund Report

exchange-traded fund, which tracks futures prices, was also ahead, gaining 0.9%.

The bullion ETFs,

streetTracks Gold Shares

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and

iShares Comex Gold Trust

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, rallied too, rising about 0.8%.

"The story at the moment is one where speculators are buying gold futures and driving prices higher," says John Reade, a gold market strategist at UBS in London. "I categorize these as momentum players," noting the absence of buying by jewelry fabricators and private investors over the past few weeks.

The lack of broad market participation, together with the relatively speedy runup in prices, is leading Reade to urge caution, despite a generally bullish outlook.

"It's come up bit too fast," he says. Spot prices have risen from around $608 in early January, or roughly 13% in seven weeks. A mere 6% rally would push gold past its multidecade high of about $725 reached last May.

Also likely helping gold was a slightly softer greenback. One dollar was recently buying 121.05 yen, down from 121.58 late previously. One euro was buying $1.3165 up from $1.3124 previously. The value of gold and the U.S. currency tend to move inversely.

Elsewhere in gold, it seems that hedging activity by gold miners was on the wane in the fourth quarter of 2006, according to a new report from the London-based specialty consulting firm Virtual Metals.

In particular, producers cut their gold price hedging by 1.5 million ounces, with activity by

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Barrick Gold

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dominating.

The process often involves buying back futures contracts, which in itself provides price support for gold. However, unwinding futures positions can be viewed as negative because once hedges are removed, less potential buying power remains.

As for the equities, UBS upped its rating on shares of

Pan American Silver

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to buy from neutral and pinned a $35 price target on the stock, following Thursday's earnings report. Shares rose 5.9% to $31.03.

RBC Capital Markets dinged shares of

Newmont Mining

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down to an underperform rating from sector-perform, sending the shares lower by 1.8%.

Palladium producer

Stillwater Mining

(SWC)

reported fourth-quarter earnings of 3 cents a share, reversing losses of 3 cents in the same period a year earlier. But it wasn't enough to satisfy investors who were expecting income of 5 cents, and the stock was marked down 5.7%.

In other news, the Manhattan-based Economic Cycle Research Institute says its Weekly Leading Index rose 3.4% last week, down slightly from a 3.5% increase the period before. It marks the 18th consecutive uptick in the indicator.

Lakshman Achuthan, managing director at ECRI, says the construction-led components to the WLI stand out as particularly strong, in line with a robust service sector, but in stark contrast to indications of a weaker industrial sector in the future.

That news will no doubt make happy reading for copper bulls, as the metal is a vital part of the building industry where it's used for electrical wiring. Copper contracts added 7 cents to close at $2.85 a pound on the Comex.