Gold Moves Up, Then Slumps In Overnight Trading

Indian gold demand hasn't been as as strong as it was, but one of the reasons for continued buying even at higher prices was made clear by the latest inflation report for the country. Inflation is now in double-digit territory as it hit 10.16% in May. Interestingly, the 10-year long bond rate is 7.64%.

In response to recent U.S. pressure to revalue the yuan, spokesman for the Chinese foreign ministry Qin Gang said last night that appreciation will not solve the structural imbalances between the two countries. He noted that one of the reasons for the trade deficit was the U.S. government preventing certain technology exports to the PRC, although the overall force he ascribed the trade imbalance to was globalization leading to specialization.

Although gold started off last night's trading with a small gain, it fluctuated around $1,230 until a little after 2:30 AM ET. A jump to $1,235.40 proved to be a false start; after reaching that level, the metal descended to the high 1220s as the fading of pessimism in the stock markets continued. That pullback was enough to drag the metal into the loss column. As of 8:03 AM, the spot price was $1,226.40 for a drop of $1.40 since Friday's close. The Kitco Gold Index attributed -$12.30 to predominant selling and +$10.90 to a weakening greenback.

The U.S. Dollar Index weakened a fair bit, also in consequence of pessimism fading. A drop below 87 last night preceded a range that kept it between 86.9 and that same number. A dip down to 86.8 starting at 1:45 reversed, but it was followed by a more serious decline two and a half hours later that took the Index down to 86.44 by 6:00. A relief rally was followed by a renewed descent down to the 86.5 level. As of 8:13 AM, it was at 86.47.

A Wall Street Journal report sums up the overnight action as gold barely moving.

Asian and European equity markets were higher in a sign that investor confidence in growth is recovering, but demand for gold remains firm, traders said. Worries over the euro zone's sovereign debt load continues to sustain safe-haven demand for gold, while some investors are also afraid of missing out on another gold rally. Gold has risen 5.5% in the past three weeks.

"[We] still see good bits [of buying] around from private customers," said Michael Kempinski, a precious metals trader at Commerzbank in Luxembourg. "I think every dip in gold people will buy in."

Also mentioned is another report from UBS, which notes that jewelry demand has been soft and scrap gold sales are steady. In order for gold to rise more, last month's ETF demand has to be duplicated from some source.

The morning Bloomberg report, as webbed by Business Week, says that gold may rise in sympathy with crude and industrial metals.

Higher commodity prices “provide an additional excuse to get involved” in gold, said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva. “A lot of people were a bit surprised that gold held so well last week. It makes the market healthier, and it’s a positive sign.”...

“There is still so much money looking for safer investments, with growing interest in gold due to the prospect of higher prices,” said Hwang Il Doo, a senior trader with KEB Futures Co. “I expect gold to resume its rally to a record.”

The article also notes that holdings in the SPDR Gold Shares trust were unchanged on Friday.

An earlier Reuters report ascribed gold's rise last night and early this morning to bargain hunting.

"We've had odds and ends bargain hunters, private banks, investment guys are still concerned," said Afshin Nabave, head of trading at NKS Finance.

"We're getting into the summer so I wouldn't be surprised if things quieten down for a while, but overall as long as the economic and political situation continues I think gold has good chance of eventually breaking the $1,250-ish area and heading
for $1,300," Nabave added.

The article also said that the recent rally in the Euro was the result of short covering.

As regular trading opened, the high 1220s gave way to the low 1220s. A drop accompanying the opening of the pit session drove gold down below $1,223, and below $1,222 shortly afterwards, as the receding of the fear trade as shown by the greenback drop reverberated to the gold market. The bottom of the early-session decline was $1,220.70. As of 8:50 AM, the spot price had rebounded a little to $1,223.40 for a drop of $4.10 since Friday's close. The Kitco Gold Index assigned -$16.70's worth of change to predominant selling and +$12.60's worth to a weakening greenback. The U.S. Dollar Index continued its decline in the same timeframe, sinking to its lowest level of the day as it touched 86.35. As of 8:53, it was at 86.39.

So far, gold has been held in check due to its recent positive correlation with the greenback. Although they diverged in last night's trading, the pit session has brought them back into line. Easing fears has drained the safe-haven trade, and may continue to do so in today's regular trading.