Chinese Tightening Intrudes Once Again

The spike-up that started off evening trading (ET) didn't last. Instead, gold reversed direction and drifted down below the $1,090 level last night. The drift reversed somewhat, pushing gold above $1,090 again, until a decline got rolling at 2 AM ET. Between then and 5:30 AM ET, gold dropped in an accelerating decline until bottoming at about $1,078. Yo-yo'ing in the next half hour got the price down to $1,076.20. Then, gold climbed back up a bit to the $1,085 level. As of 7:58 AM ET, spot gold was $1,085.70 for a drop of $6.90. Surprisingly, the Kitco Gold Index has gold up if the U.S. dollar's strength is factored out.

The PRC, as it turned out, did have a gold-dropping surprise in store. The People's Bank of China announced more tightening measures, ordering a reserve-rate hike for the second time in a month. Yesterday, it was reported that Chinese lending in January was an eye-raising 1.4 trillion renminbi - almost 1/5 of the total 2010 loan ration in 1/12 of 2010. Given that item, further tightening by the PBoC isn't really that shocking.

The news, however, gave a shock to the U.S. Dollar Index: an upwards one. The Index climed above the 80 level last night, and stayed just above it in a range until just before 2 AM. The first move was downwards, in a test of the 80 floor, but the next moves were strongly upwards. The Index vaulted up in three stages starting at 2:25 AM, from 80.09 all the way up to 80.75 right after 6:30 AM ET. That peak slightly bested the previous seven-month interday high for the greenback. Since then, the Index pulled back to just above 80.5. As of 8:14, it was at 80.57.

Naturally, the latest Bloomberg report attributed gold's drop to PBoC tightening. As the first quoted expert confirmed:

“Gold is reacting to liquidity constraints implemented by the People’s Bank of China and a further strengthening of the dollar,” said Bayram Dincer, a commodity analyst at LGT Capital Management in Pfaeffikon, Switzerland.

The article also contains a somewhat uncertain stance that's derived from a straw poll: "Nine of 22 traders, investors and analysts surveyed by Bloomberg, or 41 percent, said bullion would rise next week. Six forecast lower prices and seven were neutral."

The same reason is given by a Wall Street Journal Online report, which anticipates the retial-sales numbers and the University of Michigan consumer sentiment index as being the big drivers of the gold price, as well as oil-inventory data. The January retail-sales number was a gain of 0.5%; the expectation was for a 0.3% gain.

A Globe and Mail-webbed Reuters report also fingers PBoC tightening, and notes that the usual inverse correlation betwen the greenback and gold has reasserted itself. It also mentions the metal's upturn in terms of the Euro. In terms of that currency, it's closing in on a new high:

Gold priced in euros performed particularly well on Thursday, rising 2.8 per cent to a peak of €802.73 an ounce, within €10 of the record high it hit in December.

The metal eased on Friday to €795.92 an ounce from €799.49 late in the last session, but from a technical viewpoint it is well positioned to make fresh gains, analysts said.

“Since early December, gold denominated in euros has been locked in a well-defined contracting range,” said technical analysts at Barclays Capital. “Now that range is on the verge of giving way for a resumption of the larger bull trend.

“A break of 802 would confirm (this), pointing to a re-test of the 813 December high. However, this should prove to be only a temporary stopping point as the measured move... targets the 856 area before greater signs of topping emerge.”...

The article also notes that the SPDR Gold Trust's holdings were unchanged yesterday.

Speaking of other currencies, the one-year chart of the Kitco Gold Index shows a different picture for gold once the U.S. dollar is factored out:



The Index, graphed by the blue line, shows a channel for the past two months. Had it not been for the U.S. dollar, gold would have been in a range.

Reaction to the retail-sales release has been a slight uptick in gold and a push-down of the greenback. The metal slumped to below $1,083 by 8:30 AM, but moved up a bit after the report hit the wires. As of 9:50 AM ET, spot gold was at $1,085.70; the Kitco Gold Index had gold down $0.60 due to predominant selling. The U.S. Dollar Inded moved more definitively, droping from 80.5875 as of 8:30 to just below 80.50 as of twenty-five minutes later.

Given the expectation of no major gold-affecting news items as week's trading comes to a close, there's a good chance that gold won't do much today...if there's no noon-time excitement.