Gold futures closed lower Wednesday – failing to hold earlier gains despite weakness in the U.S. dollar, to tally a seven-session loss of more than $82 an ounce

At the same time, however, silver and copper prices gained, helping key metals-mining indexes post their first session climb since June 2.

Gold traders are "awaiting a confirmation that gold is able to part ways with commodities and reassert its role as a liquid, capital-preserving, trans-national currency," said Jon Nadler, an investment products analyst at bullion dealers Kitco.com.

"Until such a de-coupling takes place, or until gold stops being so dangerously close to its 200-day moving average the prudent buyers may stand aside, leaving the floor open to seasoned pros who live for their daily adrenaline rush," he said.

Gold for August delivery fell 30 cents to close at $566.50 an ounce on the New York Mercantile Exchange, reversing course late in the session to retreat from an intraday high of $575.50. In electronic trading Wednesday evening, the contract traded as low as $557.10.

On Tuesday, the August gold contract lost $44.50, or 7.3%, of its value, having been caught up in a sharp commodities sell-off as the dollar rallied, oil prices fell and global equity markets tumbled on concerns about rising global interest rates.

"Despite what one may hear and feel, gold's role as the ultimate currency to hold and safe-haven status didn't end on June 13, 2006," said Peter Grandich, editor of the Grandich Letter. "Every single major fundamental factor that has supported its secular bull market run remains intact."

Gold's slight decline Wednesday came even though the dollar fell against the euro and yen. Traders viewed hotter-than-expected core inflation data as not strong enough to extend the dollar's recent rally.

The May consumer-inflation data was viewed as key for the Federal Reserve as it decides whether to lift interest rates at its June 28-29 meeting. The consumer-price index increased 0.4% in May, led by higher energy and shelter costs, the Labor Department said Wednesday.

"The core number raised the odds of a Fed rate hike in June and may actually bring in speculation that the Fed won't be finished in June," said Mike Malpede, a senior currency analyst at Man Global Research.

Federal Reserve member Richard Fisher said Wednesday that inflation expectations have risen to unacceptable levels, fueling gold's late session fall, according to John Person, president of National Futures Advisory Service.

The comments were was "sent over the newswires as gold was closing – sending metals and stock markets lower as they now fear the Fed will raise rates for the 17th time by another [quarter-percentage point] to 5.25% on June 29th," he said.
Interest rates, gold and the dollar

Concerns that rising interest rates will support the dollar, and in turn pressure gold, have indeed been a key reason for gold's drop since June 5, when prices closed at $648.70.

The plunge was so severe Tuesday that some analysts said the commodities rally that sent gold to a 26-year high above $730 an ounce in May was over. But others disagree.

"Higher oil prices, the approach of a peak in U.S. short-term rates, an increase in political tensions in the Middle East, and the expected increase in commercial demand for gold in Asia (as the price stabilizes) are catalysts for increased demand for gold," said Brian Tang, analyst at Fundamental Research Corp.

However, with the dollar now expected to appreciate in the third and fourth quarters, gold prices may weaken in 2006 before starting to rise again in 2007, he said.

Gold's pullback from its May high was caused partly by the volatility in the metal's price, which reduced wealth-preservation demand for it, said Tang. At the same time, rising interest rates – last week alone, the European Central Bank, India, South Korea, Turkey, Denmark and South Africa all raised rates – have reduced demand for gold as an inflation hedge.

Add to that mix an apparent easing of tensions between the U.S. and Iran over its nuclear- research program, which has reduced gold's attraction as a safe-haven investment.

There are also signs that some of the investment funds that had rushed into commodities this year when the bull run was in full swing have become more cautious.

Signs of this reduced appetite for risk appeared in Merrill Lynch's June survey of regional fund managers released Tuesday. That report found many global fund managers, spooked by signs of slowing economic growth, shifting out of emerging markets into more resilient asset classes, like U.S. blue chips.

Elsewhere in the metals sector Wednesday, July silver futures closed up 11 cents, or 1.1%, at $9.735 an ounce after dropping 13% in the previous session. July platinum rose $20.40 to end at $1,138.90 an ounce and Sept. palladium finished up $15.95 at $292.65 an ounce after closing Tuesday at its lowest level since January.

July copper futures rose 4.55 cents to end at $3.056 a pound following a close Tuesday at a two-and-a-half month low.

On the supply side, gold inventories were unchanged at 7.79 million troy ounces as of late Tuesday, according to data from the New York Mercantile Exchange.

Silver futures rose by 5 million troy ounces to 108.9 million. Copper supplies were unchanged at 8,842 short tons.