Gold Sinks On Lower Mainland Chinese Inflation Forecast But Recovers

Although Asian inflation is becoming a more serious worry, to the point where Standard and Poor's is taking notice, an official with the mainland Chinese National Development and Reform Commission is claiming that February inflation will be lower than January's. The number is expected to be released on the 11th. Although a lower number will likely stay further tightening by the People's Bank of China (PBoC), it also would dampen the inflation trade. Consequently, gold briefly fell to $1,425.00 in the Hong Kong market.

The metal started off drooping after evening trading started, wshich reversed, and lingered in the low 1430s before that Hong Kong drop. After breaking below $1,430 and heading towards that low, it stayed stuck in the high 1420s until revived in London. Interestingly, the U.S. Dollar Index rallied at the same time gold recovered. Since the oil market is adjusting to the Libyan civil war, gold's advance may have been on technical buying. Given the turmoil there, the Libyan situation had an influence.

Gold ran from 4:30 AM ET to 6:00, reaching $1,435 in the process. A slight pullback gave way to it making its early-morning high of $1,437.80. After bumping up against that level, the metal retreated a little but was still comfortably in the low 1330s. As of 8:14 AM, the spot price was $1,433.40 for a gain of $2.30 on the day. The Kitco Gold Index attributed +$8.60 to predominant buying and -$6.30 to a strengthening greenback.

The U.S. Dollar Index, after sinking to 76.4 by midnight, rose at first hesitantly but then confidently. At times choppily, too, its rebound carried through the early morning up to above 76.8. As of 8:20, it was just below that high at 76.80 exactly.

A Reuters article, briefly covering last night's action, said that gold was supported by continued Libya worries. It also noted that holdings of the SPDR Gold Shares Trust, long a laggard in gold's recovery, jumped 6.674 tonnes to 1,217.295 tonnes.

The morning Wall Street Journal report also said gold was supported by Libya worries, but noticed some hesitation amongst traders.

"Up at these levels, it is difficult to know exactly what is going to happen next," one London trader said.

Swedish bank SEB said it expects that, in order for gold prices to rally even higher, political instability in the Middle East and North Africa must either increase further or remain high long enough for stronger oil prices to significantly slow the economic recovery.

Current indications are, though, that the geopolitical crisis in the region is yet to peak, the bank said in a note to clients, adding that it therefore remains bullish.

That same bank noted that the recovery trade is still lurking, and it may drive gold down. Another trader, in Hong Kong, is quoted as saying he expected a pullback to $1,380 because further Libyan tumult was already priced in.

A little grist for the recovery trade watchers came with the 7:30 release of the National Federation of Independent Business index for February, which edged up 0.4 points to 94.5. Although not indicative of a strong recovery, it did show a little improvement. Only 9% of small business owners, net of pessimists, thought business conditions were improving. If this report had any effect at all, it was a slight downer. With regular trading open, almost an hour after the release of that number, gold sunk a little but rebounded to keep its gain on the day. As of 8:43, the spot price was $1,433.40 for a gain of $2.30 on the day. The Kitco Gold Index attributed +$8.30 to predominant buying and -$6.00 to greenback weakening. The U.S. Dollar Index changed little in the interim: as of 8:46, it was at 76.79.

Gold's still stuck, albeit at a level well above the old $1,425 barrier. With the Libyan turmoil becoming acclimatized to, there's not much reason for the metal to gain any real traction. Today's regular trading may see the same muddling extend itself.