Gold Climbs Back Above $1,400

Gold didn't start off that well when the overnight session got moving. Fluctuating between $1,395 and $1,400 last night, it crept up above $1,400 at 2 AM ET and eased itself into a higher range of $1,400-$1,405. A decaying U.S. dollar had its influence, although its drop phase coincided with gold's. The news that more Bank of England Monetary Committee members wanted to raise the BoE rate - this time, three out of nine - didn't deter gold. Evidently, the gold market is either assuming the rate will stay at 0.5% next month or is getting used to the idea that a rate hike is a sign of inflation getting out of hand.

Although gold stayed in the higher range, it overall trend was a slow move upwards. As of 8:07, the spot price was $1,404.00 for a gain of $5.00 on the day. The Kitco Gold Index attributed -$0.70 to predominant selling and +$5.70 to a weakening greenback.

The U.S. Dollar Index spent last night and some of this morning declining, with a respite to break up the two stages of droppage. By 2:35 AM ET, it had touched 77.40. Then rising, it failed to get above 77.6 and lost its upward momentum as it reintroduced itself to its earlier low. As of 8:13, it had rebounded a little to reach 77.48.

A Bloomberg article said gold was buoyed by worries of increasing inflation and continued Mideast turmoil.

Libyan leader Muammar Qaddafi in a television address yesterday vowed to fight a growing rebellion until his “last drop of blood.” The dollar declined against the euro on speculation rising fuel costs will put further pressure on European Central Bank policy makers to combat inflation. Gold typically moves inversely to the greenback and traded within 2 percent of the record.

Gold “will continue to be boosted by geopolitical factors, inflation threats, and from a return of investment,” Tom Pawlicki, an analyst at MF Global in Chicago, said today in a report. Still, prices “have progressed to overbought levels,” which may pressure the metal, he said.

The article also mentions Euro Monetary Council member Yves Mersch musing publicly about the need to do something about Eurozone inflation. The drop in ETF holdings is continuing, with 10 gold ETFs tracked by Bloomberg seeing their holdings drop 4.86 tonnes yesterday to 2,014.8 tonnes. All of that drop was from the SPDR Gold Shares Trust.

An earlier Reuters report, covering the night stretch of the overnight session, said gold declined last night because bargain hunting has drained away and ETF holdings have declined.

"For the rally to continue, I think we need to cross $1,410. If that level is breached, then gold may hit a new high," said a dealer in Singapore.

"But my concern is the ETF ... the volume is not picking up. Technically, the market seems overbought. These are some of the factors which could somewhat cap the upside for gold going forward. What really matters is whether the tension in the Middle East will escalate further."

Also noted was the holdings of the SPDR Gold Shares Trust dropping 4.855 tonnes to 1,218.243 tonnes yesterday. Another quoted gold dealer said there was bargain hunting at the low end of gold's range last night. A meeting of the mainland Chinese Congress is scheduled, with high inflation high on the agenda.

The morning Wall Street Journal report said gold has firmed up on Mideast turmoil.

One precious metals trader said he expects the gold market to continue to gain as the unrest in the Middle East and North Africa as well as inflation fears and re-emerging worries about the financial health of some European governments create a price floor.

But Commerzbank warned gold "seems to be caught" around $1,400 an ounce and struggling to rally.

Also quoted is ETF Securities, which linked last week's Portugese debt troubles to gold's rise.

No news on the U.S. economy was released at 8:30, so gold had to find its own way. The range held, with the metal bouncing off $1,405 at the start of the pit session and then declining a little as pit trading got rolling. As of 8:41, gold was again $1,404.00 for a gain of $5.00 on the day. The Kitco Gold Index assigned -$0.45's worth fo change to predominant selling and +$5.45's worth to greenback weakening. The U.S. Dollar Index, after inching up to 77.50, dropped a little as its recovery lost momentum. As of 8:44, it was at 77.47.

One little-noticed feature of this rally was the slowness of gold's reaction to previously galvanizing events until the Egypt protests exploded. Its hesitation in the face of earlier troubles showed its distance from the spotlight back then: the continued drops in ETF holdings while it goes up evinces skepticism. The metal is still climbing a wall of worry, and shows the ability to put on gains when attention is focused elsewhere. It might suffer a pullback, but any such decline won't be that strong. As for today, $1,400 is the level to watch for: the recently habitual afternoon decline might not show up.