Gold Stay Steady Last Night But Doesn't Recover

The inflation news out of mainland China wasn't good, even if it's somewhat exotic right now to see an economy overheat. The CPI leapt from a 1.5% 12-month increase to 2.7% for February. It isn't that high as 12-month rates go, but the rate of change is fairly worrisome. There's now a widely-held expectation that the People's Bank of China is going to do something about it.

Inflation-watchers might be interested in this item: real rates in the mainland are now negative.

Since there was no good explanation for the plummet in gold yesterday morning, there's the possibility of the catalyst being this item and the PBoC's reaction to it. However, it might be my hindsight bias kicking in.

Gold didn't do all that much in overnight trading, even in response to that item. The now-established $1,105-$1,110 range held through the entire session, even if it was tested at times. One of the tests was to the upside, when Sydney and Hong Kong trading were open. The metal got above $1,110 as of 8:30 PM ET and stayed there for about an hour, but sunk back into the range. A brief test of the low around 7:30 AM, which got gold down to $1,103.80. The bottom ended up holding, for now. As of 8:08 AM ET, spot gold was at $1,105.60 for a drop of $2.60 on the day. The Kitco Gold Index attributed a $2.80 decline to predominant selling and a $0.20 gain to the U.S. dollar weakening.

Despite an attempt to get above 80.5, the U.S. Dollar Index wound up backing away from it. An early-evening rally got the Index up to 80.52 by 8 PM ET, which led to a trading range between the aforementioned 80.52 and 80.45. It broke on the downside, but descended only slightly below the low end. A two-stage rally starting at 1:15 AM got the Index up to 80.57 by 2:45 AM. That rally turned into a decline that ended at the 80.35 level by 5:30. Since then, the Index was wobbling slightly upwards. As of 8:16 AM ET, the Index was at 80.41.

A Wall Street Journal report said that the Chinese inflation datum had an influence, and that the technical picture for gold has deteriorated:

"Right now, gold is vulnerable for a break below $1,100/oz," said Eugen Weinberg, an analyst at Commerzbank. "Traders are cautious due to the proximity to $1,100/oz."

Gold is also lower in euro terms, after hitting a record high in the currency earlier in the week.

Citi analyst David Thurtell said that, "the sharp easing of the Greece crisis has removed some of the need to hold gold as a 'currency' alternative."

The rest of the article mentioned that the SPDR Gold Trust ETF (GLD) lost 0.6 tons yesterday.

An article from Bloomberg, as webbed by Business Week, attributed yesterday's sell-off to an unwinding of the Eurocrisis trade, in addition to mentioning the China inflation story:

“Speculation of tightening monetary policies could add additional pressure,” James Moore, an analyst at TheBullionDesk.com in London, said in a report. Precious metals are “consolidating” and “we expect the euro and the European Union-related news to provide short-term direction.”

Some trepidation is expressed in a quote from an analyst in Dubai:

“Demand is certainly visible in the $1,101-$1,105 range and that is probably helping the metal from an immediate crash,” Pradeep Unni, an analyst at Richcomm Global Services in Dubai, said in a report. “Investment demand is clearly on a slippery note.”

Regular trading has opened, and the range has been broken to the downside. Prior to 8:30 AM, gold moved up to above $1,109 but it shed more than eight dollars an ounce between 8:30 and 8:45. The greenback wasn't to blame; it got driven down to 80.25 at 8:30 before recovering later. The catalyst was the new jobless claim report, which saw a drop but not as much as expected.

As of 9 AM ET, spot gold recovered slightly to make $1,103.30. The Kitco Gold Index apportioned the $5.00 decline into $0.95 for strengthening of the U.S. dollar and $4.05 due to predominant selling. The U.S. dollar index recovered to the 80.5 level; as of 9:02 AM, it was slightly above.

No wonder there was trepidation expressed. The decline has gone farther than many expected, and it hasn't ended yet. The next shoe to drop is the People's Bank of China reaction to the inflation number.