Gold Starts Post-Holiday Week With U.K.-Inflation Jump

The listless drifting of yesterday's holiday-truncated session was slightly upwards, from below $1,358 at the early-morning low to about $1,361 when trading died out. Starting at that level last evening, gold see-sawed up to $1,364 before the rolling rise turned steady at midnight ET. Already rolling, the metal got an added jump from the U.K.'s latest inflation report that showed the December 12-month rate leaping up to 3.7%. Amidst talk of a Bank of England rate hike, gold got to $1,372.70 before tailing off. The cooling didn't get the metal below $1,368. As of 8:06 AM ET, the spot price was $1,368.90 for a gain of $7.40 on the day. Because of a steep drop in the U.S. dollar, Kitco's Gold Index attributed -$1.60 to predominant selling and +$9.00 to a falling greenback.

The U.S. Dollar Index, after improving somewhat in yesterday's truncated session, continued to ford upwards until 7:40 PM, when it hit 79.5. Then turning, its initial slow descent turned into an all-out tumble as night turned into morning. By 4:45, the Index had reached 78.70. A relief rally got rolling, which was not enough to get it above 79 again. As of 8:20 AM, the Index was at 78.91.

A Bloomberg report pegged the early-morning rise in gold as a rebound due to continued strong physical demand in Asia and lingering concerns about Euroland.

Prices are “starting to look attractive to Asian buyers.” Andrey Kryuchenkov, an analyst at VTB Capital in London, said in an e-mailed report today. While successful sovereign debt auctions in the region removed some support from prices last week, “economic uncertainty in the monetary union remains,” he added....

“Around this level, we still see quite good physical demand,” Bruce Ikemizu, head of commodity trading at Standard Bank Plc in Tokyo, said today by phone. “I’m rather pessimistic. The problems won’t be resolved overnight. This European financial problem will be a long-term bullish factor for gold and precious metals.”

Also noted in the article is Morgan Stanley raising its 2011 target price to $1,400.

An earlier Reuters report pointed to the same causes, while including a note of caution.

In light of the stronger data and expectations for robust fourth-quarter U.S. earnings, gold could encounter more pressure and Societe Generale analyst David Wilson said ultimately monetary policy in the United States would be the deciding
factor in the direction of the bullion price.

"It really all depends on whether (Federal Reserve Chairman Ben) Bernanke gets his way and there is further quantitative easing, which is still being talked about," Wilson said.

"If there is further quantitative easing there would be more upward support for gold."

The Federal Reserve's $600 billion bond-buying programme to stimulate economic growth in the United States has ignited concern about an unwelcome pickup in inflationary pressures and a broad-based decline in the dollar, both of which would prove beneficial to gold.

Also quoted is an Asian analyst who said $1,360 is a real bargain point for Asian buyers, who are responding strongly to a dip below that threshold. Premiums for gold bars have hit a two-year high in the region.

The more recent Wall Street Journal morning report ascribed the early-morning jump to the stumbling greenback and bargain hunting. The reopening of North American markets was also mentioned as a factor.

"Liquidity will naturally be higher today as the U.S. returns to the picture," said Standard Bank analyst Walter de Wet.

Gold traders will be looking for direction from fresh economic news in the coming days, Mr. de Wet said. While any evidence of further instability in the euro zone should be positive for the yellow metal, the real test will come with the release of Chinese inflation figures Thursday, he said.

"As far as the metals go, all focus is on China. The key to the next move [in gold] is whether Chinese inflation comes below or above expectations Thursday," he said.

$1,370 was left in the dust by a run-up just prior to the opening of regular trading. Stalling at $1,372 as of the 8:20 open, the metal resumed climbing at 8:30. At that time, the New York Fed's Empire State Manufacturing Index's January number of 11.9 was released; expectations were for 13. The disappointment was enough for a nice bump-up for gold. As of 8:47 AM, the spot price was $1,375.00 for a gain of $13.50 on the day. The Kitco Gold Index split the gain into +$5.30 for predominant buying and +$8.20 for greenback weakening. The U.S. Dollar Index's relief rally didn't break down, but it stalled; as of 8:49, it was at 78.86.

In retrospect, yesterday morning's sag has belied today's strong advance. Again, gold has bounced off the bottom of its current range. It's still near that bottom, but less so now that good news has hit the pipe. It may reverse later, but for now the metal's got the wind at its back.