Gold News

Spot gold bounces on US inflation data; flood of Dollars to roll on

Gold bullion prices jumped nearly $4 higher at the Wall Street open on Tuesday after US data claimed that inflation slipped in April.

Rising 2.3% from a year earlier, the cost of living minus fuel and food slipped to its slowest pace in 12 months, denting fears that the US Federal Reserve might raise Dollar interest rates. (Why would static rates be good for gold? Find out here...)

US stock and bond markets also rose in price, as the Dollar pulled back from Monday's one-month highs against the Yen, Sterling and Euros.

"The Federal Reserve has got one less thing to worry about," reckons Michael Cheah, manager of $2 billion in bonds at AIG SunAmerica in New Jersey.

"This could allow them more room to talk about cutting rates," he added – a much anticipated move given the collapse in America's subprime mortgage market.

Investors wanting to buy physical gold bullion for immediate delivery saw it break above $671.50 per ounce as traders sold the Dollar, pushing the Euro to a one-week high of $1.3565.

But while the long-term destruction of the US Dollar continues to make gold attractive to long-term investors, short-term noise in the gold bullion market could keep the price struggling for now.

The Euro price of gold also leapt on the US inflation data, hitting €495.40 as the Sterling price of gold spiked to £339.40.

The gold price for British investors, however, remain more than 2.5% off its high of last month.

The Euro price of gold stands more than 3% lower.

"There seems to be some good selling in the market today," according to one trader interviewed by Reuters.

Dresdner Kleinwort adds in a note that "funds are likely to liquidate also gold holdings if base metals, in particular copper prices, drop further."

Aluminum yesterday fell 1.9% as nickel and zinc both fell 2.6% and copper dropped more than 3% during London trade.

"Many [metals] markets look increasingly overheated," warns Tobias Merath in a report for Credit Suisse.

"Gold remains our preferred precious metal," he says, "in light of the growing investor interest as well as upbeat data coming from the physical [gold] market.

"The fact that central bank gold sales are now lagging considerably behind the previous years' levels will probably lend additional impetus to gold prices."

Technically speaking, "gold's failure [on Monday] to extend last Friday’s gains does not bode well for the yellow metal," says today's note from Standard Bank.

"Key support remains between $665 and the 100-day moving average around $658. As long as the metal consolidates above or within this support band, it could subsequently push off to launch another attempt towards $700 in the interim.

"A failure at this key band would open a move for gold to fall toward the 200-day moving average at $635."

Fundamentally, however, gold's key attraction – as a store of wealth when interest rates fail to keep pace with inflation – looks sure to bring fresh inflows from Chinese investors.

Food prices in China rose 7.1% in April from a year earlier, said the official data agency today. China's money supply is growing at a 17% rate.

But the flood of export Dollars now forcing Chinese equity prices into a bubble shows no sign of letting up.

China's trade surplus in April jumped by more than 60% from the same month in '06. Its gross domestic product grew by 11.1% in the first quarter of this year.

What next for the fastest-growing bubble economy in history? Read more now – here...

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum 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 he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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