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FINANCIAL MARKETS : Gold Soars Nearly $5; Stocks Inch Up : Market Overview

Highlights of Tuesday's market activity, compiled from Times staff and wire reports:

* Gold prices surged to just under $340 an ounce as commodity funds and European investors poured money into the metal. However, analysts warned that the rise may have been mostly technical.

* Stocks closed mostly higher despite the rally in gold, though implications of higher inflation kept some investors sidelined.

* Gold’s rise helped push long-term bond yields up slightly, though shorter-term rates dipped.

Commodities

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High-volume buying of gold and silver began in Europe overnight, prompted by the German central bank’s announcement that it will stick to its policy of easing interest rates in small steps.

In easing slowly, the Bundesbank hopes to avoid inflating the value of the U.S. dollar at the expense of the German mark, which could happen if investors shifted quickly from mark-denominated assets to dollar assets.

European investors viewed the news as negative for the dollar--and by definition, as positive for gold, which would be expected to win by default if dollar-denominated assets lose their luster.

When New York markets opened, the overseas rise in gold prompted a surge of buying by U.S.-based commodity funds, which usually are eager to play perceived short-term trends in commodity prices.

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“They all went like dominoes in a row once the market got rolling,” said Martin Reichenberg, trader at Pegasus Econometric Group.

By the close in New York, near-term gold futures on the Commodity Exchange were up $4.80 an ounce, to $337.00, the highest level in three months.

Near-term silver futures rocketed 14.3 cents to $3.89 an ounce on the Comex, following gold.

Many analysts cautioned against placing too much stock in the metals rally, citing the technical nature of the price surge. Partly, they noted, the metals are merely catching up with other commodity price increases this quarter.

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But economic fundamentals also seem to be hinting that inflation may be on the rise, which could help gold. Indeed, palladium and platinum rose Tuesday to their highest levels in more than five weeks on the New York Merc. Traders cited concerns that shipments from Russia might be disrupted because of political turmoil.

Platinum for delivery in July closed $4.90 higher at $362.50 an ounce. Palladium for delivery in June finished $2.25 higher at $112.20 an ounce.

In currency markets, meanwhile, the dollar hit a two-month low against the German mark, hurt by the Bundesbank news. The dollar closed at 1.6172 marks in New York versus 1.627 Monday.

Against the Japanese yen, the dollar closed at 116.55 in New York, down from 116.85.

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Stocks

Stocks churned for much of the day, then rose sharply from their lows near the close.

The Dow Jones industrials added 2.17 points to 3,457.27. The NASDAQ market was much stronger: The composite index surged 5.49 points to 686.25 as technology stocks gained.

On the New York Stock Exchange, advancing issues outnumbered declines by about 9 to 8 on the New York Stock Exchange. But volume again was subdued at 231.19 million shares.

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While the rally in gold failed to spook the stock market, it may have caused some investors to step away from the action. Typically, gold rises when inflation begins to rear its head.

Federal Reserve Gov. Lawrence Lindsey told reporters that the central bank continues to watch inflation numbers closely. Asked about recent increases in commodity prices, he said “any inflationary number makes me concerned.”

Investors also may have been disappointed by another drop in consumer confidence, which could signal new economic weakness.

Among the trading highlights:

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* Gold stocks rocketed with the metal. Homestake Mining rose 1 1/4 to 14 3/8, Newmont Gold jumped 2 5/8 to 40 1/8, and ASA surged 2 1/8 to 41 3/8.

* Many technology stocks rose sharply, which may have been the result of end-of-quarter portfolio tinkering by money managers. Some appeared to be dumping IBM and Digital Equipment for other tech stocks.

While IBM fell 1 3/4 to 50 and DEC lost 1 7/8 to 43 7/8, Intel added 1 1/4 to 115 1/2, Compaq leaped 2 to 50 1/2, and Microsoft zoomed 4 to 91.

Also, Sun Microsystems soared 1 3/8 to 29 5/8 on news that it will write a version of its operating system software for a computer being jointly developed with IBM, Apple and Motorola.

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* Drug stocks rebounded for a second day, after Health and Human Services Secretary Donna Shalala said price controls for drugs and other health care items aren’t a certainty in the Clinton Administration’s health care plans. “I don’t think they’re inevitable,” Shalala told reporters.

Among major drugs, Pfizer rose 2 7/8 to 62 7/8, Amgen gained 2 to 37, Lilly soared 2 1/4 to 49 1/8, Merck gained 1 3/8 to 35 7/8, and Upjohn added 3/4 to 30.

* Many retailers were weak as Prudential Securities cut first-quarter earnings estimates for Wal-Mart to 19 cents a share from 21 cents. Prudential cited slower sales. Wal-Mart fell 2 1/8 to 31 1/8.

Overseas, Tokyo’s rally stalled as the Nikkei average fell 85.22 points to 18,963.16.

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In London, the Financial Times 100-share average rose 14.5 points to 2,861.0. In Frankfurt, the DAX index rose 10.15 points to 1,685.07.

Credit

With the exception of yields on long-term bonds, interest rates were slightly lower or unchanged--despite the inflation warning inherent in gold’s surge.

The yield on the Treasury’s 30-year bond closed at 6.91%, up from Monday’s 6.89%.

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The mixed performance reflected a market dominated by two divergent views, one of rising inflation and the other of a lackluster economic recovery.

Any sign of inflation would tend to drive traders out of long-term bonds, because they are most vulnerable to inflation concerns.

At the same time, shorter-term bonds look attractive to investors who believe that the economy is weakening, because a slowdown would raise the chances of another Federal Reserve cut in short-term interest rates.

News of another drop in consumer confidence bolstered the case for a weak economy Tuesday.

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Market Roundup, D6


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