Inflation Data Help Push Gold Above $1,370

Mainland China inflation data for January hit a six-year high, with prices increasing by 4.9% from a year earlier. Interestingly, the safe haven that benefited from the data at the time they were unveiled was the greenback. Gold had inched up to $1,365 before the news was disseminated, and its release didn't move the metal much. That inertness changed shortly after the Hong Kong market closed. Shortly after 4:30 AM ET, the metal jumped up to the low 1370s and remained there because of U.K. inflation; the 4% rise year-on-year beat the 3.7% for January.^* A bump to $1,375.50 around 7:30 was reversed. As of 8:11, the spot price was $1,372.10 for a gain of $10.10 on the day. The Kitco Gold Index split the gain into +$8.30 for predominant buying and +$1.80 for a weakening greenback.

The U.S. Dollar Index sagged yesterday evening, to a little below 78.5, but jumped up around the time the Chinese inflation data were let out. Peaking at 78.75, the Index fell back and descended further before recovering. As of 8:16, it was at 78.48.

A Bloomberg report credited gold's rise to fears that inflation will accelerate, with the mainland Chinese data held up as an example.

“With inflation concerns heating up and the metals underpinned by a mix of physical and investment demand it looks as if further gains are in the pipeline,” James Moore, an analyst at TheBullionDesk.com in London, said in a report.

Interestingly, the article also reported that the real number was well below the median forecast of 5.4% - which explains both the initial inertness and later rally. A lower-than-expected number makes for less risk of tightening. Also in the article was a change in ETF trend: for the first time in six sessions, holdings of ten gold ETFs tracked by Bloomberg rose.

A Reuters report ascribed the rise to both the mainland Chinese inflation number and a weaker greenback.

"What we're likely to see this year in terms of investment drivers for gold being the degree of rotation in Europe and the U.S. and the more developed markets that use ETFs as a physical vehicle ... being offset by sustained physical investment in Asia and concern over inflation is mounting," said RBS analyst Daniel Major.

"There is going to be that driver for sustained coin and bar investment in 2011 that is likely to support the market."

Also noted was Hong Kong premiums on 1 kg bars dropping from $3/oz to $2, suggesting a temporary satiation of demand there.

The morning Wall Street Journal report said inflation worries encouraged demand.

"The news comes amid a series of warnings by various financial ministers over the threat of inflation on the economic recovery, and is sending investors to gold as a traditional inflation hedge," said FastMarkets.com analyst James Moore....

"It is interesting to see gold rise, despite the monetary tightening implications of the data," Mr. Moore said.

Most likely, tightening intentions are being handicapped by the difference between expectations and fact in mainland China's case.

Moving to the U.S., the January retail sales number shows a 0.3% increase - a seventh straight monthly gain, but lower than any since last summer. It was well below expectations of a 0.6% gain, although department and liquor stores (and gas stations) did well. Gold reacted well to the data, being mildly boosted beforehand by the earlier London jump. Advancing just before regular trading began, it climbed above $1,375 to make a new daily high of $1,377.90 at the time of the release. As of 8:47, it had cooled down a little and reached $1,375.50 for a gain of $13.50 on the day. The Kitco Gold Index divided the gain into +$10.60 for predominant buying and +$2.90 for greenback weakening. The U.S. Dollar Index, after reaching almost 78.55 just before the January data, turned tail shortly after its release. As of 8:49, the Index had slumped to 78.36.

The lack of response to the mainland Chinese inflaiton number was made up for by the U.K. jump, which held early on in the pit session. The metal may lose of of its jump today, but it still has the advantage.


*: Denotes a correction. An earlier version of this post mistakenly attributed gold's early morning jump to mainland Chinese inflation instead of the U.K. number. Apologies.