Gold futures closed higher Wednesday for the first time in five sessions as softer-than-expected consumer inflation data dulled expectations that the Federal Reserve will raise interest rates again and put pressure on the U.S. dollar.

The inflation data release clearly shows that Federal Reserve Chairman Ben Bernanke is "deluded in thinking that inflation is going to wither," said Ned Schmidt, editor of the Value View Gold Report.

"Gold [is] giving short-term buy signal[s] in U.S. dollars, Canadian dollars, euros and British pounds," he said.

Core consumer inflation eased in July, rising just 0.2% after four months of 0.3% gains, the Labor Department said. Economists polled by MarketWatch were expecting core consumer prices to rise 0.3%, pushing the year-on-year reading to 2.8%, its highest in almost five years.

Following the news, the dollar tapped an almost one-week low versus the euro and moved lower against other major currencies.

Gold is viewed by many as a hedge against inflation and weakness in the dollar tends to fuel investment demand for the precious metal.

Against this backdrop, gold for December delivery closed up $6.10 at $639 an ounce on the New York Mercantile Exchange. The contract lost more than $29 in the last four sessions as traders moved to unwind the terror premium built into prices during the conflict between Israel and the Lebanese Hezbollah group.

Peter Grandich, editor of The Grandich Letter, said that on a technical basis, gold is setting up for a large rally, after a medium- to long-term bottom that should be set in the next few days to couple of weeks.

"Personally, I would love to see a washout under $600 but markets rarely provide you the ultimate best scenario," he said. "Whether or not this occurs, the most important belief of mine is not only that are we going to take out the highs of earlier this year around $735, but it's only a question of when, not if, we make new all-time highs in 2007."

Grandich cited a range of factors to support his bullish outlook, including a "constructive" supply versus demand scenario with mining supply currently below expectations while demand remains high.

"While there will be a lull at times, serious geopolitical concerns in the world should give gold a strong underpinning for the foreseeable future. It's clear that the U.S. dollar is no longer the sole go-to place for safe-haven investing."
Gold investment demand climbs

A report of strong investment demand for gold in the second quarter contributed to gold's gains Wednesday, but a fall in gold jewelry demand in tonnage terms tempered the news.

Investment demand for gold in tonnage terms during the second quarter of this year climbed 19% to 130 metric tons, according to a reported complied by GFMS Ltd. for the World Gold Council and released Wednesday.

Gold jewelry demand was up 12% to $11.4 billion for the second quarter, the report said. But in tonnage terms, gold jewelry demand saw a 24% fall year on year to 562 metric tons.

"Price volatility has, as expected, had a detrimental effect on demand in tonnage terms," James Burton, chief executive of the World Gold Council said in a statement. "However, it is reassuring to see people are spending more on gold," he said, noting that the figure indicate continued investor interest and a record high in dollar terms for gold jewelry purchasing.

Looking ahead to the rest of the year, the political and economic climate remains favorable to gold investment, the report said. Still, prospects for gold jewelry demand will depend "very heavily" on future price volatility," it said.

"Many players are now hoping to witness a return of the 'seasonal flock' of jewelry buyers and are also pinning their hopes on a historical pattern of price strength during the final quarters of the year," said Jon Nadler, an investment products analyst at Kitco.com.

"If such demand does indeed come about and starts siphoning off significant tonnage from the (already) fragile market supply, then there may be some reason for investors to become less reliant on the ebb and flow of violent news from various corners of the globe as the (only) catalyst for giving gold a favorable nod," he said.

Elsewhere in metals trading Wednesday, September silver futures closed up 20 cents at $12.285 an ounce. October platinum rose $9.60 to close at $1,251 an ounce and September palladium added $11.70 to end at $336.40 an ounce. September copper dipped 5.75 cents to finish the session at $3.47 a pound.

On the supply side, gold inventories were unchanged at 8.18 million troy ounces as of late Tuesday, according to data from the New York Mercantile Exchange.

Silver supplies fell by 594,648 troy ounces to 103.1 million troy ounces and copper supplies were unchanged at 6,756 short tons.

The indexes tracking the metals sector extended their gains from Tuesday's session. The Amex Gold Bugs Index closed up 1.3% at 334.46 and the CBOE Gold Index added 1.7% to close at 145.16. The Philadelphia Gold and Silver Index finished at 143.24, up 1.4%.

Metals exchange-traded funds strengthened as well. The StreetTracks Gold Trust ETF rose 0.8% to close at $62.52, the iShares Silver Trust rose 1.8% to close at $123.24, and the Market Vectors-Gold Miners ETF climbed by 1.6% to end at $39.19.