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

Gold futures surged to their highest point in 28 months, benefiting from volatility in currency markets and the latest cut in German interest rates. Meanwhile, oil prices plunged.

* The dollar fell against major European currencies, despite the drop in German rates.

* The stock market finished marginally lower, although short-term interest rates fell.

Commodities

Gold futures for July delivery rocketed $9 to $387.40 an ounce on New York’s Commodity Exchange, a 4.4% rise that left the metal at its highest level in 28 months.

Gold’s move also pulled up near-term silver futures, which jumped 21.3 cents to $4.77 an ounce.

Analysts said the surprise gold rally, coming atop the metal’s powerful move in the second quarter, was driven in part by the German central bank’s interest rate cut.

To help prop up the German economy, the Bundesbank cut its discount rate half a point, to 6.75%, the lowest rate since February, 1991.

To gold traders, falling European interest rates offer just another in a growing list of reasons to buy gold, analysts say. For one, declining rates mean an economic turnaround in Europe--and perhaps higher inflation--could be drawing that much closer.

More immediately, the German rate cut adds new turmoil to currency markets, which have been extremely volatile this year. Wild swings in currencies boost gold indirectly by forcing traders to seek a hedge against losses.

Currency traders’ exasperation with foreign exchange markets was evident Thursday: While conventional wisdom was that a German interest rate cut should boost the value of the dollar against the German mark, instead the dollar fell.

Longer term, analysts say more investors may turn to gold out of fear--because of growing political turmoil worldwide, for example, or because of extraordinarily high stock prices in many countries.

Some savvy global investors have recently turned bullish on gold. Wednesday, Sir James Goldsmith, a prominent Anglo-French investor, said he would sell about $450 million of Newmont Mining Co. shares he owns, and invest the proceeds directly in gold bullion and options.

Meanwhile on Thursday, gold’s surge overshadowed a plunge in crude oil prices. Light, sweet crude futures for August sank 40 cents to $18.45 a barrel on the New York Mercantile Exchange.

Traders said the slide was prompted by fresh speculation that the United Nations and Iraq may reach an agreement next week for renewed Iraqi oil sales.

Currency

The dollar fell as Germany’s widely anticipated interest rate cut sparked waves of profit taking by dealers who had bet on the move.

In New York, the dollar traded at 1.695 German marks, down from 1.706 on Wednesday.

Normally, a German rate cut might be expected to make the mark less attractive. Money usually flows away from countries with low or falling interest rates.

But dealers were so well-stocked with dollars that they jumped at the chance to take winnings, analysts said.

“It’s a case of buy the rumor, sell the fact,” said David Glowacki, senior trader at NBD Bank.

But other factors also may hurt the dollar in the short run. A new economic report Thursday suggested a shrinking U.S. manufacturing sector. The National Assn. of Purchasing Management index fell to 48.3% in June from 51.1% in May.

The dollar managed to rally a bit against the Japanese yen, to 107.38 from 106.95 on Wednesday.

Other Markets

Stocks and bonds mostly ignored the gold and currency markets, awaiting today’s report on U.S. employment in June.

The Dow ended at 3,510.54, off 5.54 points. Still, winners topped losers by 7 to 5 on the Big Board, in heavy trading.

Among the market highlights:

* Precious metals stocks surged with gold’s price. ASA jumped 1 1/2 to 49 3/8, Hemlo rose 1 1/8 to 11 1/4, American Barrick gained 1/2 to 25 3/4 and Echo Bay leaped 7/8 to 13 1/8.

* Drug stocks suffered yet another big tumble. Merck lost 1/2 to 35 and Pfizer sank 2 to 65. Both were removed from Goldman, Sachs’ recommended list. Other losers included Lilly, down 1 7/8 to 47 3/8, and Warner-Lambert, off 1 1/8 to 69 3/4.

Overseas, Tokyo’s Nikkei average closed up 334.6 points to 19,924.61. In Frankfurt, the DAX average lost 9 points to 1,706.63, despite the German rate cut.

In London, the FTSE-100 index fell 11.2 points to 2.888.8.

In U.S. bond trading, long-term rates were up slightly. The yield on the Treasury’s main 30-year bond rose to 6.68% from 6.67%.

Market Roundup, D6