Tuesday, January 19, 2010

U.K. Inflation Release Leads To Paradoxical Drop

Before the release of the December U.K. inflation data, which saw the one-year inflation rate vault up to 2.9% on a one-year basis, gold was climbing. During yesterday's truncated trading, gold had zeroed in on a narrowing trading range to close at $1,132.70. Once resuming after 6 PM ET, spot gold climbed; it reached $1,141.50 shortly after 2 AM ET. Then the price of the metal began to fall, sliding all the way down to about $1,128.50 before partially recovering.

Gold plummeted some time after the People's Bank of China made it reserve-increase announcement; that fall made sense, given what it implied for future inflation in the PRC. This time, however, gold ratcheted downwards after the U.K.'s Office of National Statistics announced that U.K. inflation "accelerated at a record pace in December, surprising economists and putting inflation concerns back on the Bank of England's radar." Seeing gold pushed downwards because of unexpectedly high inflation ain't supposed to be the way the world works.

The paradox is explained by the U.S. dollar jumping on the news. From a day's low of 76.934, the U.S. Dollar Index vaulted up to 77.63 before pulling back somewhat. According to Kitco's Gold Index, also featured on the company's home page, gold was still up $6.60/oz as of 8:31 AM ET once the rise in the greenback was factored out.

That result makes gold's fall make more sense, but it doesn't erase these data contained in the same Marketwatch story about U.K. inflation: "The British pound spiked higher on the [December inflation number] then subsequently trimmed gains. The pound changed hands in recent action at $1.6372 versus the dollar. The euro fell 0.7% versus sterling to 87.38 pence."

So, as the first day of regular trading this week opens: U.K. inflation numbers hit the roof; the pound jumped up in consequence; the U.S. dollar leapt up too; gold fell. Had much-anticipated rate increases not been in the hat to pull out, I would have to wonder if the forex markets were being somewhat irrational today.

Since GLD didn't trade yesterday, the gold-at-a-discount indicator is effectively unchanged from Friday's number. The indicator only works when both products trade at the same time. To remind everyone, Friday's number was 10.20 GLD shares per ounce of gold. Once that number sinks below 10, it's likely that gold itself is due for a run-up. That's because physical gold seelling at a discount to paper gold indicates an oversold condition in the metal.

As this blog entry goes to post, the U.S. Dollar Index has pulled back to a little below 77.5 and gold has pulled back up to end up nearly unchanged relative to yesterday's regular-trading close. As of the time of the posting, spot gold's at $1,132.30. So, it becomes easier to interpret the above spill as aberrational.

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