Gold bounced as New York opened today, before racing higher to reach a 9-month high of $682 in New York.
"We see yesterday's fall as just flux on the way towards $700 later in the year," said Sherry Cooper, chief economist at BMO Capital Markets, earlier today.
If she kept onto her gold - unlike the funds that sold out when crude oil prices dipped Tuesday - that target of $700 per ounce just came much closer.
Gold leapt following news that the US consumer-price index rose 0.2% in Jan. according to the Labor Department. Economists had forecast a mere 0.1% rise to follow Dec.'s 0.4% jump.
"There's still underlying inflation expectations out there," said one US commodity analyst to Bloomberg earlier.
And history says that rising inflation pushes money into gold – provided US interest rates don't rise fast enough to increase the real yield paid by bonds and T-bills. (Click here to learn more...)
Meantime in the Middle East, today marks the UN deadline for Iran to halt its nuclear enrichment program. On Tuesday, however, president Mahmoud Ahmadinejad in Tehran said Iran has no problems with the idea of halting its nuclear program.
All it wants is "fair talks" with the West.
But the US military build-up grinds on. "The US Navy is heading into the Strait of Hormuz," said Peter McGuire of Commodity Warrants Australia earlier today.
"I am pretty sure they are not over there for water-ski practice and a picnic. With the ongoing issues in the Middle East I am expecting gold to be a lot higher."
The BBC in London also reports that the US has contingency plans to attack Iranian nuclear sites. Washington is waiting on confirmation that Iran has been developing nuclear weapons, or has been involved in strikes against US forces in Iraq.
"Some investors buy gold in times of political uncertainty," notes Bloomberg. "The metal jumped 5.3% after the Sept. 11 terrorist attacks on the US."
Gold also rose nearly 25% in the weeks leading up to the US-British invasion of Iraq. It pulled back immediately afterwards, however, before rising along the long-term uptrend begun in early 2001.
Back to this week's drop in gold so far, and "we were expecting such a move to happen after seeing sharp gains in the last few weeks," said one Tokyo analyst earlier today to Reuters.
"Gold may be put under more pressure, but we are watching whether it can hold above $655 in the near term."
The shock of Tuesday's drop – perhaps led by the weight of speculative long positions built up by US traders last week – may encourage fresh buying today, too.
"You would expect a technical bounce and bargain hunting to emerge," reckons Simon Weeks, head of precious-metals trading at ScotiaMocatta.
Over in the currency markets, meanwhile, the Yen has continued to fall today despite the Bank of Japan raising its interest rates to 0.5%.
"The BOJ's rate rise gave no big surprise," said one market analyst. The move in Yen rates leaves Japanese investors earning 4.75% less on their bank deposits than Dollar savers. Across the developed world, in fact, real interest rates – accounting for inflation – continue to look bullish for gold.