Shares Mixed as Gold Glitters

M&A boosts the tech sector, but shares battle inflation concerns, which help the precious metal.
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If lower bond prices weren't enough to make the case, evidence or rising inflation concerns could be seen Monday, as the price of gold advanced despite strength in the dollar. Inflation concerns may also help explain why stocks, in spite of a spate of merger news and lower oil prices, put in a mixed performance to start the week.

The

Nasdaq Composite

advanced 7.32 points, or 0.34%, to 2182.83. The tech sector was boosted by merger activity as

eBay

(EBAY) - Get Report

confirmed the acquisition of Web telephone company

Skype

for $2.6 billion. Separately,

Oracle

(ORCL) - Get Report

said it will acquire

Siebel Systems

(SEBL)

for about $5.85 billion in cash and stock.

The

Dow Jones Industrial Average

also rose slightly, gaining 4.38 points, or 0.04%, to 10,682.94.

But the broader market remained under pressure as investors reconsidered expectations that the

Federal Reserve

will pause its rate-hike campaign because of Hurricane Katrina's impact on the economy. The

S&P 500

dipped 0.92 points, or 0.07%, to 1240.56, weighed down by weakness in energy stocks such as

Halliburton

(HAL) - Get Report

and

Schlumberger

(SLB) - Get Report

as crude prices fell.

Although crude lost 74 cents to $63.34, the market is oozing with signals that energy-related pressures and other inflation pressures are building up.

Gold, most notably, gained 70 cents Monday to $453.70 per ounce. The yellow metal has rallied for seven consecutive sessions and gained more than $18 since Sept. 1.

Gold's gains last week were accompanied by dollar weakness, as investors had high hopes that the Fed would pause in its rate-hike campaign. But the gains on Monday came while the greenback rose more than 1% against the euro.

Gold, which is priced in U.S. dollars, normally advances when the greenback falls, as it takes more dollars to buy the same amount of gold. Likewise, it normally falls when the dollar rises.

"Gold is acting very well, given the dollar's strength. We're seeing these as signs that gold is divorcing itself from the dollar trade and is moving into the inflation trade," says Charles Nedoss, gold analyst with the Peak Trading Group.

Gold can trade higher even as the dollar rises when there are expectations of higher inflation and of higher interest rates, which are bullish for both the currency and for the precious metal.

In spite of Katrina's negative impact on the economy, at least in the short-term, concerns are mounting that soaring energy prices will more frequently be passed on down the production chain and affect core inflation. That was evident Monday, as chemical maker

Dupont

(DD) - Get Report

said it planned to lift prices on all its products, in large part because of Katrina's impact on energy and other commodity costs.

Bond prices also continued to drop Monday. Chicago Fed president Michael Moskow gave the starkest signal last week that in spite of Katrina, the Fed will need to continue raising rates to ward off future risks of inflation. The bond market has taken the cue, with the benchmark 10-year Treasury bond falling steadily last week and its yield rising from a post-Katrina low of 3.90% to 4.18% Monday, as prices fell another 17/32.

According to Miller Tabak, the fed fund futures market now sees an 88% chance that the Fed will hike rates twice in its three remaining policy meetings this year. That compares with a near 0% chance of more than one rate hike priced into the market two weeks ago, after Katrina hit the Gulf Coast.

Arguably, expectations that the Fed would lift its foot off the monetary brake have helped fuel a 3% post-Katrina rally in the S&P 500, but the time of reckoning may be at hand. The week ahead is full of key economic data, including inflation figures for August, which could prove crucial in shaping monetary policy.

The August producer and consumer price indices, to be released on Tuesday and Thursday respectively, are expected to show that core inflation, which excludes energy prices, is creeping higher, while headline inflation, including energy, is rising faster. The trend is expected to only worsen in September, because gasoline prices soared in Katrina's wake.

That could mean more pressure for stocks and bonds, while gold may shine even brighter. With gold apparently trading on inflation rather than the dollar, the precious metal may advance even if it appears that the Fed may pause in Katrina's wake. A more lenient monetary policy amid high energy prices and other price pressures would boost expectations of future inflation -- and the price of gold -- even more, says Peak Trading's Nedoss.

Likewise, nothing should prevent gold from rallying if the dollar falls this week on the back of Tuesday's July trade and August budget deficit numbers.

These and other forthcoming economic reports could lift the price of gold all the way to $470 an ounce over the coming weeks, Nedoss believes.

Some analysts are even calling for a $500 price target either by year-end or by next year. That's the call made by James Moore, metals analyst at TheBullionDesk.com in London, who says gold will remain in a bull market for at least the next two to three years.

Beyond energy-induced inflation, one of the recent positive catalysts for gold is the relaxation of gold trading in China, where individuals have recently been allowed to personally own gold.

"This is a country of several billion people, and

the Chinese have traditionally always looked to own gold for its own intrinsic value," Moore says.

Yet so much bullishness over gold does not always extend to the stocks of the companies that mine the precious metal. Part of the reason is that the price of gold rising in U.S. dollars does nothing for companies that mine outside of the U.S.

After hitting a nine-month high Friday, the Chicago Board Options Exchange Gold Index fell 0.13%, dragged lower by the likes of

Barrick Gold

(ABX)

, which fell 0.14%, and

Meridian Gold

(MDG)

, which lost 1.4%.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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