The Labor Department said its second quarter Employment Cost Index, which measures what employers pay workers for wages and benefits, rose by 1.1 percent, the largest increase in eight years. Economists expected a 0.8 percent rise, on the heels of the tame first quarter 0.4 percent increase. "That dropped the bond market and was good enough to give you inflationary fears," said Carlos Perez-Santalla, trader at Hudson River Futures, who added that producers were taking advantage of the higher gold prices to sell. COMEX December gold jumped $2.90 to settle at $259.70 an ounce after trading in a $256.40 to $260 range. Spot bullion was quoted late at $256.50/7.00 compared to the late fix at $253.90 and Wednesday's New York close at $253.90/4.40.

The 30-year Treasury bond fell nearly a point and its yieldrose to 6.07 percent on fears that the Federal Reserve would soon raise short-term interest rates to prevent any wage-based inflation from getting a foothold. Rate hike jitters also helped push the Dow Jones Industrial Stock average down about 181 points, or 1.65 percent. Newmont Mining Corp. , the largest gold producer in North America and not an active hedger in recent years, said on Thursday it had sold forward 483,000 ounces of gold at $300 an ounce in order to reduce term financing.

Newmont President Wayne Murdy said the amount sold forward was "not a large quantity" and that Newmont does not want to lose the advantage of any upside potential in gold prices. Rumors that a large U.S. producer was hedging have swirled in recent days, particularly as a possible explanation for a surge in gold lease rates.

Lease tightness abated a bit on Thursday, with one month leases at 3.02 percent, down Wednesday's 3.17 percent. Silver rallied strongly for the second straight session, having got the ball rolling onWednesday for Thursday's broad-based precious metals gains. September silver soared 17 cents to $5.435 an ounce, below its session peak of $5.46 and well above the day's low of $5.31. Spot bullion was at $5.40/43 versus the fix at $5.3225 and the previous close at $5.23/25. Dealers said the action was technical, with futures purchases by a large bullion bank gapping the metal higher at the open and helping it over the $5.38 resistance level, September basis. October platinum rose $3.30 to $345.80 an ounce and September palladium gained $3.50 to $343.05.