Gold Rises Slightly As Drop In Chinese Inflation A Non-Event

Inflation in the PRC dropped to a one-year rate of 1.5%, far lower than expected and lower than last month's rate of 1.9%. Perhaps paradoxically, the news that Chinese inflation wasn't that bad pushed the price of gold up slightly. After ending regular trading at $1,070.70 yesterday, gold started evening trading with a boost above the $1,073 level. $1,075 was surmounted a little before 8 PM ET, and the metal stayed betwen that level and $1,080 for the rest of the night and early morning. A ramp-up above $1,080 at about 5:20 was followed by a drop to $1,073.30 that ended at 4:20. After spending some time at the $1,075 level, gold climbed back to the upper end of the range. As of 7:39 AM ET, the metal's price was $1,078.70 for a gain of $7.00 on the day. Almost all of it was due to predominant buying.

After staying above the 80 level in the late afternoon, the U.S. Dollar Index went for a tumble during the night, which lasted until very early in the morning. It bottomed at 79.0 around 12:40 AM. After that decline, the Index climbed back up to just below 80, after which it slid back down a little. A steeper rise commenced from the 79.83 level around 5:25 AM, taking the Index up all the way to 80.05 before exhausting itself. A sink-back to the 79.87 level preceded another leap to 80.04 before another pullback took place. As of 7:48 AM, the Index was at 79.94 and inhabiting a range centered around the 80 mark.

The U.S. dollar was once again cited as the prime mover of the metal in a Bloomberg report webbed by Business Week. The first expert quoted says that the rise doesn't seem very solid:

“As the dollar retreats somewhat, demand for gold is reviving,” said Jeon Yeong Min, a trader at Hyundai Futures Co. “The gains don’t look so convincing at the moment, as Greece’s problems are heavy on the minds of market players.”

Marc Faber is quoted as saying in a Bloomberg TV interview, '“I won’t rule out that gold will go down to $950 or $1,000, but I don’t expect more downside... I don’t see any scenario where gold will collapse.”' For him, that's pretty bearish; coming at a time when gold's close to hugging its yearly close-low, it has some significance.

An impending bailout of Greece is also cited in a Reuters report, which also fingers the greenback as the main influence:

"The gold price is trading in sympathy with the euro/dollar this morning as markets are waiting for confirmation and details of a potential bailout plan to Greece by euro zone member countries," said BNP Paribas analyst Anne-Laure Tremblay.

"While the details of a plan are unlikely to be given today, an explicit commitment to support Greece would probably provide some reassurance for markets," she added.

In the latter part of the story, it's noted that Asian demand is still robust. If Chinese numbers disappoint, Indian numbers shouldn't. [Another report, however, says that price sensitivity amongst Indian jewelry buyers still exists even though it's wedding season.] Also noted is that the holdings for the SPDR Gold Trust remained unchanged yesterday; they're still at 1,106.38 tons.

This BullionVault.com report, by Adrian Ash, explains the night rise in the gold price as the result of short covering plus some European buying. Two quoted experts both expressed caution admixed with long-term reassurance:

"Our short-term view [on Gold Bullion] is bearish," says today's Commodities Daily from Standard Bank, because the current "strong physical demand" will likely fall away after next week's Chinese New Year.

"This kind of respite in the Gold Price will allow [the Middle East and Indian] markets to recuperate a little bit," says Jessica Cross, CEO of London's VM Group consultancy, speaking on Mineweb's weekly podcast.

"Because at the end of the day we have to have physical coming off the market, and those physical areas really do support the supply demand balance in the long run."

This chart of the gold price, going back two years, has an indicator at the bottom I want to focus upon. The indicator in question, the Full Stochastic, is the only one on the chart:



I want to call attention to a negative divergence on the right hand of the full-stochastic graph. Een though gold's most recent low was lower than the last, the stochastic bottomed at a higher level than it was at the last low. It was lower still at the higher low set in late December. That divergence is supposed to signal a reversal of trend. The last time this pattern asserted itself was in August and September of 2008. Back then, the divergence preceded an explosive relief rally that evaporated and turned into a lower low as of late October. There hasn't been a relief rally to the same extent this time 'round, so the chances of a turnback plummet are low. It's possible that a new low will be made due to some further dollar-boosting event. However, it looks like the divergence may be signalling a turnaround. This guess gibes with a contrarian interpretation of the bearish or cautious near-term sentiment expressed above.

As of 7:45 AM, gold is above $1,080 after making a leap up to $1,086.60 that took place shortly after regular trading opened. The gain of $10.30 from yesterday's close is portioned by the Kitco Gold Index into an $11.45 gain due to predominant buying and a $1.15 loss due to the dollar's strengthening. After sagging at about the time the spike-up in gold took place, the U.S. Dollar Index has gained as well: from 8:02 to 8:50, it's climbed from 79.90 to 80.1. A surprise sharp drop in the jobless-claims numbers was the cause. The combination of a gain in gold and a gain in the greenback is odd, and doesn't bode well for one of them. Recently, it's been gold that's suffered; that same pattern may recur today.