Daily Gold Update

Source: Marketwatch

New York— Gold futures dropped Friday in volatile trade, as investors shrugged off dollar weakness and speculation that Israel's planning a ground invasion of Lebanon.

Gold for August delivery was last down $7.50 at $625.0 an ounce on the New York Mercantile Exchange.

Other metals prices also posted losses. Silver dropped 12.5 cents to $10.940 an ounce and copper declined 8.45 cents at $3.3250 a pound. Palladium declined $6 at $306 an ounce and platinum dropped $4.30 at $1,222 an ounce.

"Volatility continues to buffet the gold markets once again as the week draws to a close," said Jon Nadler, analyst at Kitco.com. "Swinging within a $25 range, the precious metal is struggling to find its bearings as news item after news item tugs at it in different directions."

Gold posted modest gains before falling on Friday, disregarding the weak dollar, rising crude oil prices and news that Israel may invade Lebanon. Crude oil for September delivery was last trading up 73 cents at $75 a gallon, while the dollar dropped to one-week lows against the euro and Japan's yen.

Trading in metals has been very volatile lately, marked by big price swings in both directions.

"The market is on hold," said Ross Norman of TheBullionDesk.com, adding that traders are waiting to see whether the end of the Fed rate-hiking cycle is indeed approaching. Norman said that gold will rise in the long term: "It's not a question of if; it's a question of when."

Frederic Panizzutti, a senior Vice President at MKS Finance S.A., said that he expected trading to remain very volatile next week.

"The "conflict" in the Middle East remains the main influence factor for gold and shall continue to prevail over the coming days," Panizzutti said. "Surely the market remains positive for the medium gold term price outlook, but the tight correlation to the ongoing conflict makes it unpredictable."

On Friday, the Israeli army said that it has mobilized thousands of reserve troops and has told civilians in southern Lebanon to leave the area immediately, media reports said.

Israel continued bombing targets in Lebanon and Israeli troops continued to battle Hezbollah forces. Several rockets struck Haifa, Israel's third-biggest city, according to reports. Since the fighting broke out last week, at least 330 Lebanese and 34 Israelis have been killed.

In another development, U.S. administration officials said that Secretary of State Condoleezza Rice will present on Friday a diplomatic plan for ending the conflict and will travel to the Middle East on Sunday, according to media reports.

The diplomatic plans have resulted from two days of meetings with United Nations Secretary-General Kofi Annan and other U.N. officials. Annan has called for an immediate cease-fire, but the proposal has been rejected by the United States. Rice's weekend trip to the Middle East would be the first American on-the-ground diplomatic effort since the outbreak of the conflict.

John Person, president of National Futures Advisory Service, said he expects gold's downtrend to continue into next week.

Person cited several reasons for his bearish outlook. First, Federal Reserve Chairman Ben Bernanke's testimony signaled that long-term inflation appears to be under control and as a result gold may not be needed as an inflation hedge, Person said. Second, oil prices will also pull back, particularly if supply data next week shows an increase in inventories, easing fears that Middle East violence would disrupt supplies.

"The war time 'fear factor' that demanded a price premium is currently being wrung out of the market as traders see that there have been no supply disruptions in oil," Person said. "Gold as a 'flight to safety' is less of a consideration as well."

Peter Grandich, editor of The Grandich Letter, said he remains a long-term gold bull, while he is bearish to neutral on base metals like copper.

"While geopolitical events are adding to the volatility, I continue to believe gold should trade in a broad range of $575 to $675 through the end of August," Grandich said in a note to investors. "Strong seasonal factors and a continuing long list of bullish fundamental and technical factors should lead to a new year high in the fall."

On the supply side, gold inventories were up 39,807 troy ounces at 8.1 million troy ounces, according to Nymex data. Silver supplies were flat at 102.9 million troy ounces and copper supplies were unchanged at 7,144 short tons.

The indexes tracking the metals sector dropped Friday. The Amex Gold Bugs Index declined 1.4% at 315.43 and the CBOE Gold Index dropped 1.3% at 137.62.

Metals exchange-traded funds also declined. The StreetTracks Gold Trust ETF dropped 0.6% at $62.14, the iShares Silver Trust ETF rose 1% at $110.05 and the Market Vectors-Gold Miners ETF was last down 1.2% at $36.39.