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NY gold gets lukewarm lift from CPI, stock scare

NEW YORK: Comex gold gained on the back of troubling US inflation data on Friday and a nauseating drop in stock prices, but the initial flight into the shiny, one-time safety net had little sticking power, dealers said.

"The safe-haven issue has been thoroughly disproved this morning," asserted Leonard Kaplan, chief dealer at LFG Bullion Services in Chicago. "While there still remain a few who seek it as a safe haven, those numbers are dying quickly and today is the perfect example."

COMEX gold for June delivery ended up $1.40 at $284.60 an ounce, well under the top of its $282.50 to $288.50 range.

Bullion closed in New York at $282.50/283.50, versus the London bullion close at $282.10/282.90.

It initially jumped on the specter of higher U.S. interest rates and an unravelling bull market in stocks raised by U.S. figures showing the March Consumer Price Index (CPI) jumped a surprise 0.7 percent, the largest gain in almost year.

Especially vexing for every market but gold was the 0.4 percent jump in the core inflation rate, which excludes volatile food and energy prices.

This was the biggest in five years, upping the ante for the Federal Reserve to raise interest rates faster. But that gets problematic because it also sent the tech-heavy Nasdaq crashing another 8 percent and the venerable Dow industrials down a disturbing 4.8 percent by late afternoon, seemingly perfect conditions for a gold rally.

"Had you asked even the most ardent gold bug what conditions would create a bull market, the two most common things they would say would be a collapse in the stock market and a rise in inflation rates," Kaplan said. "Today we have a confluence of both of those factors. The bottom line is gold is an industrial metal -- period."

Decades ago, gold was procured to protect portfolios from crisis in other assets markets, and had a reputation of holding its value against inflation. But its historical allure has dimmed in recent years as central banks lightened their gold reserves seeing inflation as essentially dormant.

"It doesn't seem like you are going to get much bang for the buck in the gold market right now," said David Rinehimer, head of commodities research at Salomon Smith Barney. "Particularly with the central bank selling that's going to occur over the next two to three years," he said.

There are many alternatives to parking hot monies in gold. Nearly all other paper assets could beat the near-zero percent returns that make the yellow metal more attractive to borrow and sell short than to own. Even cash wins out if gold falls.

"I'm more inclined to think that there will just be movement of capital in between new economy and old economy stocks, between equities and fixed income and between our financial markets and financial markets outside the U.S. -- more than a dramatic movement of capital into say gold," Rinehimer said.

But many expect gold to slowly grind higher if stocks keep tumbling, even though a return to the highs hit last October after European central banks agreed to limitations on gold sales is seen unlikely near term.

Also, shares of North American gold mining companies proved to be one of the few bright spots in Friday's stock market fiasco. The XAU gold and silver mining index on the Philadelphia Stock Exchange was up 4.25 percent mid afternoon.

May silver ended flat at $5.175, like gold backing off the $5.24 high hit in the knee-jerk spike after the CPI numbers. Spot silver went out at $5.13/15, near its last $5.12/15 close and London's $5.13 fix.

NYMEX July platinum rose $6.80 to $487.60 and June palladium rose $20.25 to $580.95.

"(It's up) a little bit with the gold but that's a pretty poor showing when you consider how much extra cash there is in the market," said a dealer at a PGM refinery. "Palladium is just a super-thin market. I guess its up because the others are up."-Reuters