Gold prices gain on inflation risks – The Australian

Posted on February 9, 2011 by

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GOLD neared three-week highs today as a Chinese interest rate hike highlighted simmering global inflation pressures.

The most actively traded contract, for April delivery, rose $US15.90, or 1.2 per cent, to settle at $US1364.10 a troy ounce on the Comex division of the New York Mercantile Exchange. Thinly traded front-month gold gained $US15.80, to $US1363.40, its strongest close since January 19.

China, the world’s No. 2 gold market after India, raised benchmark lending and deposit rates last night in the latest of a series of tightening measures, further stoking global inflation fears amid surging worldwide commodity prices.

Gold, which doesn’t earn interest, is traditionally a hedge against inflation and often falls as interest rates rise and investors are drawn into higher-yielding assets.

But instead of having a calming effect, China’s hike of its one-year lending and deposit rates to combat inflation reinforced fears that other governments have been “complacent” in letting easy monetary policy run too long, said Michael Gross, broker and futures analyst with OptionSellers.com.

“A general fear of infflation outweighed the action by China to tighten,” he said.

Atlanta Federal Reserve president Dennis Lockhart said “inflation anxiety is rising” within the US, and sought to calm nerves, saying, broadly speaking, price pressures remain low.

He added that emerging-market economies, such as China and Brazil, can deal with any inflation pressures building in their own economies.

Some Fed critics have pointed to the US central bank’s ultra-loose monetary policy as stoking inflation — particularly in food prices — in smaller economies.

Although core inflation remains subdued in the US, worries about longer-term price rises in the world’s largest economy have also supported gold.

The combination of ultra-low interest rates — which also boost the allure of non-interest bearing gold — and Federal Reserve purchases of Treasuries to stimulate the economy is causing some to believe the Fed won’t be able to sponge up extra liquidity in time to avoid problematic consumer and producer price increases over the longer term.

Those inflation concerns have been heightened as Treasury bond yields have recently jumped to their highest levels since May.

“You’re continuing the inflation story no matter where you look,” said George Gero, vice-president with RBC Capital Markets Global Futures.

Other precious metals traded in New York also rose. Comex March silver rallied 3.2 per cent. Nymex April platinum gained 1 per cent, while March palladium on the exchange added 2.4 per cent.

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Posted in: APAC