Gold Stays Above $1,370

Gold drifted down once trading resumed for the evening, but it turned around before $1,370 was hit. Rallying without any conviction, it stayed below $1,375 until 2 AM ET. Near the end of the Hong Kong session, it rallied to a new morning high of $1,379.00. Giving up those gains when the London market opened, it settled back down to the low $1,370s as Bank of England governor Mervyn King gave a speech. As the decline ended he said that U.K. CPI prospects are far from certain. He and the Monetary Policy Committee seem to believe that U.K. high inflation is temporary and will diminish in 2012. His remarks coincided with the end of the decline. Later, he also said that the Bank of England may not raise its rate at all in the coming months. With this backdrop, gold stayed steady around $1,372 until 7:30 when it rose again to around $1,375. As of 8:17, the spot price was $1,374.50 for a change of $1.20 on the day. The Kitco Gold Index attributed -$0.20 to predominant selling and +$1.40 to a weakening greenback.

Gov. King's remarks had a more salutary effect on the U.S. Dollar Index, which spent most of the overnight session in a two-stage decline that ended when it reached 78.2. Then flailing around between that level and 78.35, it broke above and rallied to almost 78.6 before pulling back a bit. As of 8:23, the Index was at 78.55.

A Bloomberg report said gold fluctuated as traders weighed the odds of another People's Bank of China tightening in the wake of higher than targeted mainland Chinese inflation.

“Support will continue to come from increases in inflation, growing investment,” Tom Pawlicki, an analyst at MF Global in Chicago, said today in a report. “Opposing pressure will be offered by potential tightening in China.”

India’s benchmark wholesale-price index rose 8.23 percent in January, Indonesia’s inflation is 7 percent and South Korea’s is 4.1 percent, the latest government data show. The Bank of England today forecast inflation will accelerate further from a two-year high and peak at about 4.4 percent before easing to its 2 percent target by the middle of 2012.

“Tensions in the Middle East will continue to be an issue,” MF Global’s Pawlicki said. Gold gained the previous two weeks as mass demonstrations in Egypt forced President Hosni Mubarak to cede power to the army.

Those tensions continue, even though gold hasn't been that responsive to them. The report also noted that holdings of ten gold ETFs tracked by Bloomberg fell 3.21 tonnes yesterday to 2,016.98 tonnes.

A Reuters report said gold steadied after being helped by data showing global inflation is picking up.

"In January we saw real interest rates, at least for long maturities in the United States, rise quite a bit," said Tobias Merath, head of commodities research at Credit Suisse. "Ten-year yields went up, real rates went up and that prompted some profit taking."

"Now yields are a bit more stable and inflation expectations are more to the forefront, and that is why gold prices have stabilized." Gold's usual inverse relationship with the dollar was also returning as economic conditions normalized, he added....

Dollar watchers are now awaiting a raft of U.S. data due later in the session for direction, with January producer price index and housing starts numbers due at 1330 GMT and industrial production reading out at 1415 GMT.

"Today's PPI data could well give further clues as to the inflationary pressures building in the U.S. economy, after yesterday's import price data came in nearly double expectations at 1.5 percent," said CMC Markets analyst Michael Hewson.

Despite gold rising, holdings of the SPDR Gold Shares Trust dropped by 1.52 tonnes yesterday to a nine-month low of 1,224.01 tonnes. Indian buying went on hold because of a local holiday.

The morning Wall Street Journal report said that gold held steady after being pumped up by essentially technical buying yesterday.

"The threat of rising inflation has been lingering for a while, and is already largely factored into the gold price," noted a trader. More significant to gold's strength is its break through a series of key resistance levels, he said, including $1,370.

"People are buying dips because it looks it like the short-term downtrend has been broken," the trader noted.

The article also quotes Edel Tully, who said that sentiment towards gold is steadily improving even though the metal didn't react to the scrape the Portugese government recently experienced over its debt load.

January U.S. producer prices went up 0.8%, while the core rate went up 0.5%. The data both missed and beat expectations, which called for 0.9% and 0.3% respectively. January housing starts were up 14.6% to 596,000 units seasonally adjusted, well above market expectations for 520,000. Building permits declined, though. The gold market didn't take these data very well, slumping from about $1,375 to $1,373 right after they were released. Perhaps the housing-starts recovery disappointed, perhaps the PPI jump was seen as anomalous in an environment where the 12-month increase is still low. Despite a blip-up, gold didn't recover all that much from its downtick. As of 8:45, the spot price was $1,373.60 for a gain of $0.30 on the day. The Kitco Gold Index assigned +$2.20's worth of change to predominant buying and -$1.90's worth to greenback strengthening. The U.S. Dollar Index resumed its rally just before and after the data were released; it was the clear beneficiary from those items. As of 8:48, it had reached 78.72.

Gold may be moving upwards only in fits and starts, but its short-term trend is still upwards. It may not be that responsive to items that would have propelled it upwards in a more heated market, but it's more resistant to falling than rising. Its action, or lack of, is consistent with it licking its earlier wounds. There may be further inaction in today's regular session, but its stepwise ascent denotes that improving sentiment Ms. Tully mentioned.