Gold Rises, But Fails To Hold On To Gains

April inflation for mainland China eased sightly from last month's figure, clocking in at 5.3% versus March's 5.4%, but it was slightly above expectations for 5.2%. The gold market took well to the figure: the metal rose above $1,520 shortly after Hong Kong trading opened and stayed a little below $1,525 until around 3 AM ET. Then, it bumped up against $1,525 and tried unsuccessfully to rise above. It did so later, peaking at $1,527.70 around 5:00. Then it lost its momentum as the Bank of England's Inflation Report signalled a rate hike sometime this year unless inflation abates. Not only did gold fall below $1,525 again, but it also fell below $1,520 and even $1,515 in the ensuing sell-off. As of 8:13, the spot price was $1,513.40 for a drop of $2.70 on the day. The Kitco Gold Index split the loss into -$0.30 for predominant selling and -$2.40 for a strengthening greenback.

The U.S. Dollar Index spent most of the overnight session fluctuating around the level at which it started the evening: 74.55. As night turned into morning, the waverings became wider until a rise to 74.65 made way for a fall below 74.4 between 3:35 and 4:40. Then reversing, it spent the rest of overnight climbing steadily as it got back above 74.6. As of 8:20, it was inching up at 74.67.

A Bloomberg report said gold advanced on inflation concerns, fueled by the mainland Chinese inflation report, and continued worries about Eurozone sovereign debt. More specifically, there are rumours that some other European government are blocking a new aid package for the Grecian government.

“We still have unresolved issues with the euro zone,” said Bernard Sin, the head of currency and metal trading at MKS Finance SA, a bullion refiner in Geneva. “In the long term, it may be sensible to hedge against inflation with gold. Physical demand is extremely good” from India, he said.

Edel Tully is quoted as saying UBS' gold sales in India are about 10% above what they were the same time last year.

An earlier Reuters report said gold had advanced on the Chinese inflation number and a softening greenback.

"Gold is generally benefiting from the return of confidence from investors," said Darren Heathcote, head of trading at Investec Australia. "They are very happy buying on the dip, as we see the same old problems hanging around."

That dip-buying, though, has not extended to gold ETFs. Holdings of global gold ETFs are down to their lowest point this year. So are holdings of the SPDR Gold Shares Trust, which were unchanged yesterday at 1,201.95 tonnes.

A Wall Street Journal report said gold was up, but not by that much.

The market's reaction to slightly higher-than-expected Chinese inflation data has been quite muted, despite the use of precious metals as an inflation hedge....

"While the data highlights inflation problems in the region and is feeding into gold sentiment, it didn't tell the market anything it didn't already know," said RBS analyst Daniel Major.

8:30 saw the release of the March U.S. trade-deficit numbers: the gap widened to $48.2 billion for the month, wider than the $47 billion expected. Both exports and imports rose. Gold's sell-off before the opening of the pit session continued at the start of it: the drop didn't reverse until the metal hit $1,510.50. Then snapping back, the metal rose a little further when the trade-deficit number ws released. As of 8:40, the spot price was $1,514.30 for a drop of $1.80 on the day. The Kitco Gold Index attributed +$2.00 to predominant buying and -$3.80 to greenback strengthening. The U.S. Dollar Index wasn't affected much by the news when it was released. After continuing its run all the way up to 74.75, it stalled at that level around 8:30 and then slipped back. As of 8:45, it was lingering at 74.69.

Gold managed to lose the gains it had racked up over most of the overnight session, but its losses are slight even after a more than ten-dollar tumble. There's a good chance it'll recover from its tumble, as drops just before and at the start of regular trading don't forecast the rest of the session very well. Even if the declines continue, there's not much chance that gold will sink below $1,500 and stay there: that level continues to offer support now that the plummets are over.