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Prices to Buy Gold Slip vs. Dollar, Rise vs. Euro as "Good" Chinese & Indian Gold Investment Demand Spurred by Inflation Fears

Prices to Buy Gold slipped from an overnight bounce for Dollar investors but rose in Euro terms Thursday morning, as the US currency extended its rally.

World stock markets turned higher. Crude oil slipped but held above $90 per barrel after yesterday's 1% jump on unexpectedly strong US economic and energy demand data.

Silver Prices bounced from the last 3 sessions' 7% drop.

"If [Friday's US] payrolls data meets or exceeds expectations, it will put some pressure on Gold Prices in the short term," a Hong Kong dealer told Reuters earlier.

"But this year gold is still on uptrend...[Today] we've seen very good physical demand help push gold from below $1370 to the current level."

Traders from both India and China, the world's top two physical gold consumers, were "heavily on the bid" for gold overnight, confirms another dealer, noting that – ahead of next month's Chinese New Year celebrations – premiums above London Spot Gold prices today rose to $1.30 per ounce in Hong Kong.

"Our physical gold sales to India [on Tuesday] were the highest in 12 months," said UBS strategist Edel Tully in a note – "a time when gold was trading around $1100."

But "despite very decent physical demand across much of Asia," she adds, "a stronger Dollar and, more importantly, growing conviction in the US recovery as macro data improves [mean] gold is struggling to assert itself."

The Bombay Bullion Association said Wednesday that India's Gold Bullion imports reached 700 tonnes in 2010, a rise of 46% from 2009's depressed levels.

The BBA says 2011 imports may hit a record 810 tonnes thanks to rising Gold Investment demand stoked by inflationary fears and enabled by fast-rising household incomes.

"China's economy is continuing steady and relatively fast growth [but] our country is also facing rising inflationary pressure and expectations," says People's Bank of China governor Zhou Xiaochuan in a new magazine interview.

Rather than discussing further interest-rate hikes – which left saving-deposit rates untouched at barely half the current pace of consumer-price inflation last month – "we may dynamically adjust selective reserve ratios" to try and curb new lending by China's banks, he said.

Zhou also blamed "the quantitative easing policies adopted by the US and other major economies" for a "noticeable spill-over effect on international liquidity, which further intensifies imported inflationary pressure."

"The fundamentals sustaining the gold rally will continue to be strong in 2011," reckons BNP Paribas analyst Anne-LaureTremblay, highlighting "problems on liquidity, inflation and concerns on the US Dollar."

Back in Thursday's action, a slight drop in Sterling saw the Gold Price in British Pounds trade little changed near 3-week lows at £882 per ounce.

The Gold Price in Euros meantime rose to regain half of this week's near-3% drop as the single currency fell on the forex market.

Wednesday saw the first sale of the 17-nation Eurozone's "Stabilization Mechanism" bonds, used to save Ireland from going to market to finance its massive budget deficit.

In the open market, the European Central Bank "remains the main buyer of Portuguese government securities," says a note from Goldman Sachs.

"Since May, the ECB has effectively removed from the private markets roughly the equivalent of the entire gross supply of Portuguese medium-to-long-term government bonds for 2010."

Sold with an annual coupon of 2.50%, the Eurozone's collective ESMF bonds – issued with a 5-year maturity – pay less than a third of what the market currently demands on 10-year Irish debt.

Five-year German bonds currently offer a yield of 1.87% per year. German consumer-price inflation was pegged at 1.8% year-on-year in Dec.

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Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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