gold:ya pays yer money & takes yer chances

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    By Myra Saefong
    Friday, February 20, 2004

    SAN FRANCISCO -- Gold futures fell as much as $16 an
    ounce Friday, closing at a three-month low as a
    heightened terror alert in Japan boosted the U.S. dollar
    and dampened investment demand for precious metals.

    Gold for April delivery traded as low as $394.50 an ounce
    on the New York Mercantile Exchange before closing at
    $398, down $12.30. For the week, the benchmark
    contract's loss came to $12.80.

    The decline marks the biggest session drop in gold
    futures since Jan. 29, when the February contract fell
    $16 an ounce.

    The dollar surged Friday vs. the yen and other major
    currencies, extending its gains after Japanese
    authorities raised the nation's terror alert to its highest
    level in nearly a year.

    Strength in the dollar pressures investment demand for
    gold because the dollar-denominated metal becomes
    more expensive for foreign traders to buy. Gold also
    tends to lose some of its allure as investors seeking
    higher returns turn their attention to alternatives such
    as an appreciating dollar.

    John Person, head financial analyst at Infinity Brokerage
    Services, believes that besides the news on Japan's
    terror alert, U.S. retail-level inflation data for January
    "were favorable to a stronger dollar."

    Consumer prices rose a sharp 0.5 percent in January,
    driven by higher gasoline and fuel oil prices, the Labor
    Department said.

    "The outlook of higher inflationary pressures gave traders
    a clue that if that trend continues, the Fed may be at a
    position to raise interest rates sooner rather than later,"
    said Person.

    "The concept that higher interest rates would support the
    dollar by attracting foreign capital -- that seems to be the
    theme today," he explained.

    All in all, that puts the dollar in a favorable position to
    gain strength in the months ahead and places an upside limit
    on gold, Person said, adding that he expects prices for
    the yellow metal to fall back down to the $380 level in the
    weeks ahead.

    But Grady Garrett, chief trading strategist at, a commodity information provider,
    questioned whether the dollar could sustain its gains.

    "With the current fundamental setup (low interest rates
    and expanding deficit), it is unclear that any near-term
    bottom in the greenback will be able to hold up," he said.

    So "the prospect of further dollar weakness is likely to
    continue to underpin the price of the yellow metal," he

    With that in mind, Todd Hultman, president of believes that Friday's decline is
    "overdone and that time will prove it out."

    "While it is reasonable to expect the Federal Reserve to
    raise interest rates sometime this year, there still is no
    urgency to do so and [Friday's] inflation report does
    not change that," he said.

    In contrast to Person's expectations, Hultman said
    gold "continues to favor higher prices, based on the
    Federal Reserve's low interest rate (weak dollar) policy
    and little, if any, increase in gold production this year."

    The June contract for gold will likely make new contract
    highs in the next 3 to 6 months, he predicted.

    Taking a look at the even bigger picture, Peter
    Grandich, editor of The Grandich Letter, an investment
    publication, said investors bullish on gold are "going to
    have to figure out how to sidestep days when a declining
    euro is impeding their process."

    "The last missing ingredient to what would be a classic
    gold bull market is to have gold rising in most major
    currencies, not just against a falling U.S. dollar," he

    "The fact that gold still retreats when the euro declines
    tells us bulls we still have some work in front of us,"
    Grandich said.

    In other metals action Friday, copper futures eased
    back after climbing in each of the six previous Nymex
    sessions, and other metals prices followed suit.

    March copper closed at $1.3085 per pound, down 2.1
    cents. The March silver contract ended down 12.5 cents
    at $6.533 an ounce, while April platinum fell by $14.10
    to close at $839.20 an ounce and sister metal March
    palladium ended at $233 an ounce, down $10.25.

    On the supply end, copper supplies were down 1,328
    short tons at 249,168 short tons as of late Thursday,
    according to Nymex. Silver stocks were down 47,836
    troy ounces at 123.9 million troy ounces.

    Meanwhile, gold inventories stood at 3.48 million troy
    ounces, down 32 troy ounces from the previous session.

    Key indexes for mining shares mirrored the broad decline
    in the metals futures market, retreating to their lowest
    levels in two weeks.

    Tracking the mining sector as a whole, the Philadelphia
    Gold and Silver Index and the CBOE Gold Index each fell
    more than 2 percent to close at 97.55 and 83.69, r

    The Amex Gold Bugs Index declined 3.3 percent to end
    the session at 222.3.

    Among the biggest index-component losers were shares of
    Apex Silver Mines and Durban Deep, which ended Friday
    with losses 5 percent
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