FINANCIAL MARKETS : Gold Soars to 3-Year High; Dollar, Stocks Close Lower : Market Overview

Gold futures prices surged to their highest point in nearly three years on New York’s Commodity Exchange on fears of inflation.

* The dollar traded lower against major European currencies, despite a long-awaited cut in interest rates in Germany.

* The stock market finished mostly lower. Long-term bond yields edged upward.

Commodities

Metals analysts said announcements from the central banks of Germany, Austria, Belgium, Switzerland and the Netherlands that they would cut interest rates could signal increased inflation abroad.

On New York’s Commodity Exchange, gold bullion for current delivery settled at $387.40 an ounce, up $9 from Wednesday. Silver rose 21.3 cents to $4.771 an ounce

A cut in German interest rates had been rumored for some time. Germany’s economy is weak and the Bundesbank was under pressure to make the cut to stimulate growth.

Against this backdrop, Germany’s central bank announced Thursday it was lowering its discount rate half a percentage point to 6.75%, the lowest level since February, 1991. It cut the so-called Lombard rate one-quarter percentage point to 8.25%. Other European central banks followed suit.

The discount rate is the Bundesbank’s cheapest fee on loans to commercial banks. The Lombard rate is the rate at which banks can borrow emergency funds overnight from the central bank.

Early weakness in the U.S. dollar and technical factors sparked massive buying of all the metals, including palladium and platinum.

A jump in the Commodity Research Bureau’s index of 21 key prices also contributed to the gains, said Peter Cardillo, director of research for Westfalia Investments Inc. in New York.

Meanwhile, light, sweet crude oil for August delivery was 40 cents lower at $18.45 a barrel on the New York Mercantile Exchange.

Currency

Traders said the dollar’s weakness against European currencies came because of poor U.S. economic news and because it had been bid up in anticipation of the German rate cut. The dollar rose against the Japanese yen.

Since market participants had been trading in expectation of the cuts, the moves did not prompt buying. News of a sluggish U.S. economy, however, did trigger selling, analysts said.

The National Assn. of Purchasing Management reported that its monthly index fell to 48.3% in June, from 51.1% in May. That level indicates contraction in the manufacturing sector and bodes poorly for the economy as a whole.

The dollar traded late at 107.38 Japanese yen in New York, up from 106.95 yen on Wednesday. It fell to 1.695 German marks, down from 1.706. The British pound rose to $1.515 up from $1.492.

Other Markets

The Dow ended at 3,510.54, off 5.54, after weaving at moderately lower levels during most of the session. But advancing Big Board issues managed to maintain a lead over declines of about 7 to 5. Big Board volume totaled 292.04 million shares, up from 284.71 million on Wednesday.

Among the market highlights:

* Precious metals stocks managed to chug ahead, helped by strength in gold. Sunshine Mining was the most active issue on the NYSE, rising 1/4 to 2 3/4. Other heavily traded mining shares included Homestake Mining, up 1 to 20 1/8, and Amax Gold, up 1/2 to 9 7/8.

* On the NASDAQ market, technology and health care issues suffered losses. Intel fell 1 to 54 and was the market’s volume leader. Apple Computer shed 1 1/2 to 38 and U.S. Healthcare slumped 2 5/8 to 44 7/8.

Overseas, Tokyo’s 225-share Nikkei average closed up 334.6 points at 19,924.61. Frankfurt’s DAX 30-share average closed at 1,706.63, up 9 points, and London’s Financial Times 100-share average lost 11.2 points to end at 2.888.8.

Meanwhile, in the credit markets, the yield on the Treasury’s main 30-year bond rose to 6.68% from the previous close of 6.67%, as soaring prices of gold and other commodities briefly reignited fears of inflation. The 30-year bond’s price, which moves in the opposite direction, fell 3/32 point, or 94 cents per $1,000 in face value.

The federal funds rate, the interest on overnight loans between banks, was 3.375%, down from 3.5% late Wednesday.

Market Roundup, D6