Spot gold prices were whipped Thursday by US inflation data that spooked traders into first buying the Dollar – and then selling it – as US Treasury bonds continued their decline.

Costs for US manufacturers and industry rose 4.1% in the year to May, said the Labor Dept. just ahead of the Wall Street opening.

Economists had forecast a 3.6% rise after April's 3.2% annualized increase.

The spot gold market dropped below $650 – the level it had held right through the Asian and early European sessions – before spiking sharply to $652 per ounce.

In Tokyo gold futures for April '08 had earlier closed the day ¥31 higher per gram – a rise of 1.2% for the day. But a sharp fall in the Yen, down to a fresh four-and-a-half low versus the US Dollar, capped the Dollar-equivalent price at $657 per ounce.

The Nikkei stock index also rose, gaining 0.6% even as US Treasury bond yields ticked higher from Wednesday's pullback to reach 5.22%, threatening to raise the price of money worldwide.

Versus Sterling gold bullion prices held above £330 after the Producer Price shake-out.

Gold versus the Euro whipped around €489.50 per ounce as the European single currency sank to a new 3-month low against the Dollar below $1.3300.

"As long as long yields aren't making a run for higher levels, it makes sense that people are dipping their toes back into stocks again," reckons David Bianco, chief equity strategist at UBS in New York.

With the Dollar-price of gold moving in lock-step with global equities so far in 2007, that would mean gold is tied to the current fortunes of US bond yields as well.

By the start of business in New York, the FTSE All-Share in London had gained 0.8%,  while the Dax in Frankfurt, Germany, leapt 1.5% higher.

The major US stock indices opened flat, with all eyes now tomorrow morning's US Consumer Price data. Another surprise could well spark fresh selling of US government debt.

"The bond market is very sore," Paul Mortimer-Lee, chief market economist at BNP Paribas, said to Bloomberg earlier.

"We've had a lot of news, big packets of news that forced the market to sell off.

"Any more bad news – like stronger growth, higher inflation – will make the US bond market back off some more."

Should investors expect the gold market to back off on rising inflation data, too? Looking at the technical picture for spot gold prices, "gold is walking a very thin tightrope," reckoned one Tokyo trader speaking to Reuters earlier today.

"What might come to the rescue," says Wolfgang Wrzesniok for Heraeus, the German refining giant, "is a possible sharp increase in physical demand as a result of the now much lower prices.

"Should that materialise, the metal might have a chance to shrug off the overhanging threat and stay instead in a range between $635 and $675 an ounce."

Today's action in India, however – the world's largest single gold market, and the destination of one ounce in every 5 sold last year – says that bargain hunting has yet to overcome seasonality.

Prithviraj Kothari, director at Riddisiddhi Bullion in Mumbai, says that that "demand is very slow." He doesn't see Indian gold demand for jewelry fabrication picking up until the autumn wedding season draws near.

But longer-term, Indian demand for gold remains strong. Gold imports rose by 50% during the first three months of this year compared to Q1 2006, said the World Gold Council yesterday.

The key festival of Akshaya Thrithiya in April saw gold sales to private consumers hit 60 tonnes, versus 32 tonnes sold during the 2006 festival. That helped to push total Indian gold imports up to 211 tonnes during the three preceding months.

And despite the record gold price in Rupees achieved last year, physical gold imports slipped only 1% in volume terms, said the WGC.

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