Gold drops, ready for a nearly 8% loss for the week
Jump in dollar and hope for end to rate rises are cited; copper sinks

Last Update: 1:05 PM ET May 19, 2006

SAN FRANCISCO -- Gold futures slumped Friday to their lowest level since late April, headed for the fifth loss in six sessions and trading more than $50 an ounce lower for the week as a jump in the U.S. dollar and hopes for an early end to interest-rate rises gave traders less incentive to buy the precious metal.
"After more than three months of a marathon run, the gold market took this week to finally begin a decent correction and reconsider its place in the hierarchy of chart values," said Jon Nadler, an analyst at Kitco.com, adding that "gold has almost wiped off $100 from its recent high price." Prices rose to a nearly 26-year, intraday high of $728 late last week.
Gold for June delivery traded as low as $651 an ounce on the New York Mercantile Exchange, its weakest intraday level since April 28. The contract was last down $22.90, or 3.4%, to $658. It closed out last Friday at $711.80.
Widely viewed as a hedge against inflation, gold has now tumbled $63.50, or 8.8%, since closing at a 26-year high of $721.50 on May 11. The quick drop raises the question of whether this is a full-blown retreat or just a setback within a longer-term uptrend.

With the dollar returning to the vicinity of the recent highs, we suspect that a negative currency market psychology is going to continue hanging over the gold market," Nell Sloane, an analyst at NSFutures.com said in daily commentary.
The U.S. dollar ran up to a 1 1/2-week high against the yen after Bank of Japan Governor Toshihiko Fukui damped hopes for a June interest-rate rise by saying overnight that ending the country's zero-interest-rate policy was not specifically discussed at its latest meeting.
"We have no preset idea on the specific timing for exiting zero interest rates," Fukui said.
"While the Japanese have come out with economic information ... that points to expanding growth, the promise of higher global interest rates seems to countervail some of the hope for improving physical demand," said Sloane.
"Both physical and investment demand remains off balance, especially with the U.S. dollar rising and the U.S. equity market generally hinting at a slowing of the U.S. economy," said Sloane.
But "Asian traders this morning suggested that the decline in gold prices this week, has attracted jeweler, fabricator and investor demand," she said.
Elsewhere, bond guru Bill Gross, the chief investment officer of Pacific Investment Management Co., said in an interview on CNBC that he believes the Federal Reserve is likely to pause in its rate-increase program, leaving its federal-funds rate target at 5%.
In addition, U.S. Treasury Secretary John Snow said on CNBC that inflation is "well contained, and will be, and inflationary expectations are well contained."
Drop and bounce
From here, "gold remains vulnerable to revisit the $630 (or lower) levels," said Nadler, but there "appears to be no mad rush for the escape hatches" and even if it revisits that level, it won't likely sustain any permanent long-term damage.
"We do expect gold to once again become an attractive buy at the low end of the scale, as investors in the yellow metal are typically focused on the far horizon," he said.
Indeed, "the bulk of the correction in the metals market is now behind us," with the exception of copper, which "has a ways to go to the downside," said Peter Grandich, editor of the Grandich Letter.
He expects gold and silver to "bounce strongly early next week."
Copper sinks
The outlook for copper, however, is a bearish one.
Copper is going to "end up" between $2-$2.50 before the year's end, Grandich said.
July copper took a 24.1-cent, or 6.5%, dive to $3.47 a pound after touching a low of $3.43 earlier, its weakest level since May 8. The metal has now lost 14.1% from its intraday record of $4.04, set May 11.
"The key negative pricing driver, other than the growing realization that a large chunk of last Friday's peak was speculative froth, has been the emergence of increasingly bearish supply-demand data" for copper," said Matthew Parry, an economist at Moody's Economy.com.
The International Copper Study Group released its latest Copper Bulletin Thursday, he said, pointing out that the report depicted a 0.5% year-on-year decline in global refined copper consumption in the first two months of 2006, with particularly weak demand seen in January, which was down 2.5% year-on-year.
Adding to copper's price pressure, key producer, Grupo Mexico announced earlier in the week that it has cancelled plans to mothball its San Martin mine, as workers agreed to return to work, according to Parry.
"Although prices for the red metal will post occasional short-term rallies (inevitable in a declining market), Moody's Economy.com remains essentially bearish on copper prices going forward, as the market will tend towards being oversupplied," he said.
July silver was also down 19 cents, or 1.5%, at $12.33 an ounce Friday, after tapping a six-week low of $12.08. It's trading around 13% below the week-ago close of $14.235.
June palladium dropped $28.50, or 7.7%, to $344 an ounce; and July platinum lost $15.30 to $1,282.50 an ounce. Last Friday, palladium closed at $398.50 and platinum finished at $1,318.50.
On the supply side, inventories of copper fell 392 short tons to 11,531 as of late Thursday, according to Nymex.
Gold inventories were unchanged at 7.80 million troy ounces, while silver inventories were at 121.6 million troy ounces, up 581,453 troy ounces.