Gold Hovers Around $1,350 Before Taking Off

The People's Bank of China raised its key interest rate last night, from 5.81% to 6.06%. A decision that would once have rocked the gold market was taken in stride. Interestingly, it was copper that was pushed down by the decision.

Gold stayed mostly between $1,350 and $1,352 last night, briefly sinking below $1,350 after that announcement but recovering later. Just before 3 AM ET, the metal broke through $1,352 and briefly jumped up above $1,358. Remaining in the mid-high 1350s for more than two hours, it fell back to around $1,350 again. As of 8:15 AM ET, the spot price was $1,351.00 for a drop of $1.10 on the day. The Kitco Gold Index attributed -$4.50 to predominant selling and +$3.40 to a weakening greenback.

The U.S. Dollar Index didn't hold above 78. Initially fluctuating between that level and 78.1, it sunk until from 9:35 until 3:30 before spiking back upwards to 78 again. Only touching that level, it resumed its decline until it bounced off 77.7 a few times and rebounded a little. As of 8:24, it was at 77.83.

A Reuters report said that the rise in the PBoC rate did limit gold gains, but other factors counterbalanced that hike to leave gold steady overall. Both equities and the greenback fell, and ETF levels stabilized.

"Chinese investment or jewellery buying has been pretty strong over the last quarter, and I wouldn't have thought that it is going to slow down particularly," said Societe Generale analyst David Wilson.

"Gold is getting some support from nervousness about northern Africa and the Middle East, and obviously still bubbling in the background are concerns about Europe," he said....

"While the euro debt crisis is not in people's minds, the situation in the Middle East has become more important, so that will prevent investors from making any big sales," said LBBW commodities strategist Thorsten Proettel.

"The SPDR holdings have been nearly unchanged, and profit-taking from investors has perhaps stopped for the moment," he said.

A Wall Street Journal report said gold initially slipped after the PBOC annoucement but only for a while.

While trading conditions have been quieter than usual, with Chinese players absent for New Year celebrations, industry participants appear convinced the hike won't significantly influence the country's growing demand for the precious metal.

A more bullish sentiment has also returned to the market in recent days, helping to support prices, analysts said. Despite uncertainty and a lack of conviction among investors, the failure of spot prices to fall below $1,343 an ounce, considered by some to be an important technical level, since last Thursday indicated investors are still showing interest in the metal at current prices.

Regular trading changed the muddling completely. From the $1,350 level, the metal shot up to a new daily high of $1,366.90 before the excitement wore off. As of 8:42 AM, the metal was at $1,361.70 for a gain of $9.60 on the day. The Kitco Gold Index split the gain into +$6.35 for predominant buying and +$3.25 for greenback weakening. The U.S. Dollar Index fluctuated between 77.8 and 77.9 before poking above the higher level; as of 8:45, it was at 77.91.

A little more than a year ago, a rate hike from the same People's Bank of China clipped a recovery off at the knees. Almost met with a yawn this time 'round, its lack of baleful influence on gold is reason enough to get optimistic. The spike-up may have been due to short covering. If so, gold's newfound gain may melt away but its technical position will still remain strong.