Gold Rallies On U.K. Inflation Data

Trouble is still ticking over in the usual trouble spots. In Libya, Gadaffi remains defiant. In Yemen, President Saleh got Parliament to endorse a 30-day state of emergency that grants him powers akin to martial law. There are basically peaceful protests in Syria, continuing for the fifth day in a row, which the Syrian government is acting repressively towards. All of these trouble spots helped add to safe-haven demand for gold.

But, the news that revved up the metal during London trading was 12-month U.K. inflation rising to 4.4%. The number was higher than expected, and increases the chance that the Bank of England will raise its rate from the current 0.5%. The retail price index, also beating expectations, rose to 5.5%. The U.K.'s inflation number is now about the same as mainland China's.

Gold, which eased back to a $1,426-$1,428 range last night, started moving up a little before London trading opened. When the inflation news hit, it climbed up smartly to reach $1,434 with little pullback. As of 8:10, the spot price was $1,433.00 for a gain of $4.20 on the day. The Kitco Gold Index attributed +$7.80 to predominant buying and -$3.60 to a strengthening greenback.

The U.S. Dollar Index continued its uptracking as the Euro fell. Rallying last night to 75.65, it slumped back to 75.5 in early morning. A final slip to just above 75.4 preceded a renewed and stronger rally that got it up to 75.72 around 8:00. As of 8:17, the Index eased back to 76.65.

A Bloomberg report ascribed the rise in gold to Mideast turmoil and concern over the Eurocrisis. The minority government of Portugal may fall today because the main opposition party won't back a new austerity package.

“Gold prices could remain supported in the near-term by Middle East tensions,” Tom Pawlicki, an analyst in Chicago at MF Global Holdings Ltd. (MF), said today in a report. “Support could come from sovereign debt worries in the euro zone. Worries over the safety of the euro could resume the push into commodities and hard assets as safe havens.”

The article also notes that European financial leaders are divided about what to do with the remains of the Eurobailout fund.

An earlier Reuters report said gold prices held firm last night as increasing safe-haven demand was muffled by a greenback rebound.

"Gold is still taking its cue from the situation in the Middle East," said Ong Yi Ling, an analyst at Phillip Futures, adding that it could increase safe-haven flows into the precious metal....

[On the other hand:] "Investors don't know what to do -- we see profit-taking at the high price range, but fears of inflation as well as the Middle East crisis triggers buy-back by speculators when prices go down," said a Hong Kong-based dealer.

Holdings of the SPDR Gold Shares Trust dropped again yesterday, but much more moderately than Monday's drop. As of yesterday, holdings were down 0.91 tonnes to 1,214.87 tonnes.

A Wall Street Journal report said gold climbed, but it still lacks a meaningful driver to accelerate it into a new bull run. Oil prices remained steady.

Investors continued to eye developments in Japan, where work continued to avert a nuclear disaster, and the Middle East, where allied air strikes in Libya also continued. But analysts said the situations will need to escalate to provide any further real support to the gold price.

Any pullback in the gold price, though, will likely be seen as a good bargain-hunting opportunity, [a] trader said....

The article also cites UBS, who is still upbeat about gold because the five-day moving average is above the ten- and twenty-day ones.

With no data on the U.S. economy slated for the 8:30 slot, gold was not influenced from its rest around $1,433. The opening of the pit session did not lead to the earlier rally extending itself. As of 8:42, the spot price was $1,433.00 again. The $4.20 gain on the day was apportioned by the Kitco Gold Index into +$9.60 for predominant buying and -$5.40 for a strengthening greenback. The metal was not bumped down by the U.S. Dollar Index's continuing rally; by 8:45, the Index had reached 75.78.

Although the Portugese trouble did aid gold's upwards climb, as did the Libyan warlet and Yemeni turmoil, the U.K. inflation data indicated the slow waking up of the traditional driver for gold: higher inflation. Although resurging inflation does mean central banks will raise rates, those institutions' records show a clear track record of being too little and too late. Although boosted by official promotion, mainland Chinese demand for gold has remained strong all through the People's Bank of China tightening efforts. Should inflation psychology take hold in the developed world, we'll see the same thing here.

In the more immediate term, gold may repeat its morning slip as profit-taking enters the market.