Gold Softens In Overnight Session, Stays Above $1,360

After an initial climb to $1,365, gold softened last night to almost $1,360 before rebounding just after midnight ET. Moving back up to as high as $1,366.40, hit just before 4:00, the metal then sunk below $1,360. Getting as low as $1,357.50 two hours later, it reversed course and lumbered back up above $1,360. As of 8:08, the spot price was $1,361.90 for a drop of $1.60 on the day. The Kitco Gold Index attributed +$4.80 to predominant buying and -$6.40 to a strengthening greenback.

The U.S. Dollar Index, after dipping in early evening, reversed course and advanced. Initially spurting up and backtracking, it then climbed more steadily as the run matured. Peaking at almost 78.7 around 6:00, it pulled back a little. As of 8:17, it was at 78.57.

A Bloomberg article described gold's fluctuations as being caused by a tug-of-war between pessimism due to a stronger greenback and hope for more demand due to the Egyptian turmoil.

“A stronger dollar has added pressure,” said Andrey Kryuchenkov, an analyst at VTB Capital in London. “Investors are not in a rush to jump back on. Egypt remains in focus so the downside will remain limited.”...

China this week joined India, Indonesia, Thailand and South Korea in boosting interest rates as Asian policy makers sought to cool the economies leading a global rebound. The U.S. Dollar Index headed for its first weekly advance in a month on speculation inflation will accelerate as the U.S. labor market improves.

The “interest rate hike in China shows real concern about inflation,” said Wallace Ng, executive director with ABN Amro Securities Asia Ltd. in Hong Kong. “We expect more buying from China. That should increase local people’s interest in gold purchases as an inflation hedge.”

The article also said holdings in ten gold ETFs tracked by Bloomberg fell 4.33 tonnes to 2,019.41 tonnes.

An earlier Reuters article said a slow physical market in Asia, strength in the greenback and drops in ETF holdings all combined to put some pressure on gold.

"There's not much going on in terms of demand in the physical market. That's why there are some stocks kept here. (People) try to sell them immediately," said Dick Poon, manager of precious metals at Heraus in Hong Kong, referring to physical
supply.

"The production side and manufacturing are not back to normal after the Chinese holiday. Maybe next week. I think gold is most likely to trade in the range of $1,350 to $1,370 right now."

The article also says that import demand from India had dropped off in Singapore because the price is too high for a buying spree and too low for unloading. Also, holdings of the SPDR Gold Shares Trust (GLD) declined 0.91 tonnes yesterday to 1,225.53 tonnes.

A Wall Street Journal article noted that gold did not respond to a jump in Portugese government bond yields, a sign that Portugese government finance are in a spot of trouble. That lack of uptick prompted speculation that hedge funds aren't that interested in gold right now.

"I suspect that the smart money that has been in gold for three or four years may be getting out slowly as the threat of interest-rate rises looms," a trader said. The slow ebb of money out of gold exchange-traded funds may be indicative of this, he said....

The recent hype over bullion may also be putting some big buyers off, the trader said.

"When the fever pitch around a metal is such that even [U.K. retailing giant] Tesco is dealing it, there is often a feeling that the trend is over and it's time to sell," he said.

The greenback did go up, which has provided some downdraft now that gold isn't responding that much to new trouble in Europe.

The trade deficit number for December widened to $40.6 billion, which was below expectatons for a gap of $42 billion. Both imports and exports rose, the former jumping up more than the latter. The trade gap with mainland China was $20.7 billion for the month and a record-high $273 billion for the year. Overall, the U.S. trade deficit for 2010 was $497.8 billion. The gold market liked the number, again anticipating a favorable report by rallying when regular trading began and building on the earlier rally after the data were released. As of 8:41, the spot price was $1,366.60 for a gain of $3.10 on the day. The Kitco Gold Index assigned +$8.00's worth of change to predominant buying and -$4.90's worth to greenback strength. The U.S. Dollar Index ticked down on the news, but not by that much; it held steady a little later. As of 8:44, it was at 78.52.

Gold may not be that responsive to the Portugese government's debt troubles as yet, but it has shown some responsivness to U.S. troubles. The market is gradually sizing up the U.S. as the place to watch for new trouble. Inflation may be some ways away, but gold is benefitting a little from skepticism about the pureness of the current recovery. The metal keeps going below $1,360 but is having a hard time staying there. It holding above $1,360 will set a good tone for the first day of regular trading in mainland China this Sunday night.