Gold settles near $1,529 on inflation, debt worries

Gold prices rose to settle above $1,529 on Wednesday, as a rate hike in China put inflation concerns back in the spotlight, and as worries over euro zone debt stoked safe haven buying.

After rising in tandem with oil and grains a day ago, gold rose on Wednesday despite mild losses in other commodities, shrugging off a stronger dollar as broad risk-aversion pushed prices toward the top of the market’s two-month trading range.

Spot gold was last bid around $1,530 an ounce, against $1,515.70 late in New York on Tuesday.

U.S. gold futures for August delivery settled up $16.50 to end at $1,529.20 an ounce.

Overnight, China’s central bank increased interest rates by 25 basis points, its third increase this year, making clear that taming inflation is a top priority even as economic growth slows modestly.

“China has done a number of reserve requirement increases over the last several months — however, you have climbing inflation, so in real terms you are not making any money by just holding cash,” said VM Group analyst Carl Firman.

“A lot of new middle-class Chinese have cottoned on to this, and there is a lot of demand for gold as a store of wealth under these circumstances.

The euro slid for a second straight session against the U.S. dollar as China’s interest rate hike prompted investors to shed exposure to riskier assets in a market already rattled by a downgrade of Portugal’s debt to junk.

Often this would weigh on dollar-denominated gold in overseas markets. But the risk aversion trade draws investors to both assets.

“The stronger dollar could stall a prospective rally if there is a flight to safety… but then you will witness again what happened in 2009, when the correlation between the dollar and gold was positive,” said Firman. “That could very well manifest itself over the next couple of months.”

The metal was also taking support from concerns over euro zone debt after Moody’s cut Portugal’s credit rating to junk status, and an upcoming debate on raising the U.S. debt ceiling.

“The issues surrounding the euro zone are going to last for quite some time, so they are something that markets are going to have to be dealing with on an ongoing basis,” said Macquarie analyst Hayden Atkins.

Bonds issued by the euro zone’s weaker countries came under intense pressure after the Moody’s cut, which raised fears Portugal would also eventually be pushed into a debt restructuring.

ECB Meeting Awaited

Traders are closely watching the European Central Bank’s policy meeting on Thursday. The bank is set to lift euro zone interest rates to 1.5% and to show no sign of softening its stance that Greece must not default on its debts.

Expectations that the ECB will hike rates more quickly than the U.S. Federal Reserve have helped lift the euro more than 7% against the dollar so far this year, supporting gold.

From a technical perspective, the precious metal is facing tough resistance after its latest break higher.

“We see resistance at $1,518 and $1,528 which represent the 50% and 61.8% of our June drop from $1,558 to $1,479,” said ScotiaMocatta in a note.

“We believe the market will maintain its bearish slant while the metal holds below $1,518 but will shift neutral on a close back above that level.”

On the supply side of the market, investors were awaiting fresh developments in a strike in Freeport-McMoran’s Indonesia mine as well as the threat of a strike in South Africa’s main gold mines.

Silver was higher at around $36 an ounce against $35.45, spot platinum eased to $1,734.50 an ounce from $1,737.05, and spot palladium edged up to $771.47 an ounce from $770.38 on Tuesday – Reuters

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Posted by VBN on Jul 7 2011. Filed under Gold. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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