By Allen Sykora
Of Kitco News
http://www.kitco.com/
(Kitco News) - Gold futures are higher in the aftermath of the third Chinese rate hike since autumn Tuesday, with traders viewing the tightening as a sign that inflation is gaining traction in the country. A weaker dollar also helped the yellow metal.
Copper initially fell after the rate hike, but has since pared its losses on ideas that Chinese demand should remain strong anyway, analysts said.
At 9:22 a.m. EST, most-active April gold futures were $15.20, or 1.1%, higher at $1,363.40 an ounce on the Comex division of the New York Mercantile Exchange. The market developed technical follow-through momentum as it rose in the aftermath of news that the People’s Bank of China will increase the one-year yuan lending rate moving to 6.06% from 5.81%.
“China raised rates and gold went up as a confirmation of the inflation story,” said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures.
Charles Nedoss, senior market strategist with Olympus Futures, tied gold’s gains to weakness in the dollar as well as concerns about Chinese inflation. The dollar index fell back below 78.00.
“Why is China doing this (raising rates)?” Nedoss asked rhetorically. “Well, they are doing this to cull inflation. That’s a concession that inflation is here, alive and well.”
And, investors buy gold as a hedge against inflation.
Mike Zarembski, senior commodities analyst with optionsXpress, said it may take “really dramatic action” from Chinese authorities if they are going to stem inflation. If so, this could curb some commodity demand from investors. But instead, gold is continuing to rally from weakness last month.
“Maybe we’re going to see much higher-than-expected inflation numbers out of China,” Zarembski said. “Unless the government really puts the hammer down and makes it known they are serious about cutting inflation, I think the trend overall is still bullish and corrections are a healthy way to get weak longs out of the market.”
Institutional investment demand appears to be returning to gold after its correction lower during the early part of the year, Gero reported.
Also, said Nedoss, gold has broken up through the 20-day moving average of $1,352.70, encouraging some chart-based buying. He put the next key level at the 100-day average of $1,362.20, which gold has also edged above as it made a high for the day of $1,365.90.
It would be technically significant if gold can close above the 100-day level, Nedoss added. “Above that, there is not much (chart resistance) until about $1,376. Above that, it’s $1,400,” he said.
Meanwhile, at 9:24 a.m. EST, most-active Comex March copper futures were down 2.45 cents, or 0.5%, to $4.5505 per pound. The red metal fell on worries that the monetary tightening would cool the economy and thus demand for copper, used for construction and manufacturing, Gero said.
Still, March copper bounced from its overnight low of $4.5060.
“The fact that it’s down (only around) 2 cents shows you how strong that market really is,” Zarembski said. “I think traders really believe these rate increases are not going to stop the increase in demand from Asia.”
He suggested Chinese authorities might want to “put the brakes on” but also do not want to “slam the economy.”U
Analysts with Barclays Capital, in their daily research report, said they don’t expect Chinese hikes to prevent continued growth in base-metals demand, unless the tightening were to become excessive. They pointed out that China raised rates from 2004 until early 2008 without interrupting an upward trend in prices.
“In our view, provided there isn’t an over-tightening, then Chinese base metals demand will still be on track for another year of strong, albeit slower, growth,” Barclays said.
By Allen Sykora of Kitco News; asykora@kitco.com
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