Gold rebounds on dollar drop; Chinese rates steady

By Frank Tang

NEW YORK (BestGrowthStock) – Gold rose toward $1,400 an ounce on Monday after a 2 percent decline last week, with investors buying bullion as the dollar weakened, China kept interest rates steady and a U.S. tax cut extension loomed.

The dollar fell, partly on concern a tax cut extension could swell the U.S. budget deficit. This gave gold a boost, as did signs that inflation is heating up in China, which has so far refrained from raising interest rates.

“There is inflation coming through the roof when it came to the Chinese data,” said Bill O’Neill, partner of New Jersey-based commodities firm LOGIC Advisors.

China’s inflation soared past forecasts as its November consumer price index hit a 28-month high at 5.1 percent on a year-on-year basis.

Last week, China boosted bank reserves, a move investors see as less aggressive than an interest rate hike.

Spot gold rose 1 percent to $1,396.87 an ounce at 2:47 p.m. EST. U.S. gold futures for December delivery settled up $13.10 an ounce to $1,398.

Silver resumed its rally after last week’s decline, sharply outperforming gold. Silver climbed 3.5 percent to $29.54 an ounce, dropping the gold/silver ratio to near its lowest level in four years.

COMEX gold and silver futures volume were about 50 percent below their 30-day averages, preliminary Reuters data showed. Some trading desks and funds have closed their books ahead of year end.

Frank McGhee, head precious metals trader of Integrated Brokerage Services LLC in Chicago, said the prospect of a deal to extend U.S. tax cuts, which will increase fiscal deficit and could lead to inflation, underpinned gold.

The $858 billion package, which would keep lowered income-tax rates from expiring at year end, was expected to clear a procedural vote in the U.S. Senate on Monday.

Investors also had an eye on Federal Reserve policy makers who meet on Tuesday. The Fed’s bond buying program has boosted gold in recent months as investors worry that loose monetary policy could eventually lead to a loss of purchasing power.

In the COMEX futures markets, speculative buyers have increased net longs, or bullish positions, by 2.3 percent in the week to December 7, while silver’s net longs dipped 3.2 percent, CFTC’s weekly Commitments of Traders report showed.

Reuters commodities specialist Christopher Henwood said gold will set new highs by December 31, but won’t break the $1,500 level until early 2011.

GOLD VULNERABLE AS VOLUME THIN

On charts, gold has hit selling pressure at $1,400 an ounce, failing to stay above that level after hitting a record high at $1,430.95 an ounce last Tuesday.

Adam Hewison, president of MarketClub.com, said gold could rise further after breaking above key resistance at $1,394 an ounce on a spot basis, which triggered a buy signal according to his technical models.

Hewison, however, said gains near year end are vulnerable to pullbacks as a small buy order could lift gold sharply without significant volume as most traders are out.

U.S. Treasuries prices rose on Monday after an early sell-off sent yields to their highest level in six months, attracting buyers back into government debt. (US/: )

Last week, slumping U.S. government bond prices raised yields, prompting some reallocation from precious metals to fixed-income assets.

A meeting of European Union leaders later this week is set to pave the way for private sector investors to shoulder losses in case of a sovereign debt restructuring, but delegates remain divided on more concrete steps to shore up the region.

For now, gold’s retreat from record highs has sparked consumer demand from jewelers and physical investors, bullion banks reported.

On the investment side of the gold market, holdings of the world’s largest gold-backed exchange-traded fund, New York’s SPDR Gold Trust, declined by a further 3.95 tonnes on Friday. (GOL/SPDR: )

The trust saw outflows of 8.2 tonnes of metal last week, or 0.6 percent of its total gold holdings, its biggest one-week outflow since early October. It is still the world’s sixth-largest holder of gold, ahead of Switzerland and Japan.

Platinum rose 2 percent to $1,697.99 an ounce, and palladium gained 3.5 percent to $753.72.

(Additional reporting by Amanda Cooper and Jan Harvey in London; Editing by David Gregorio)

Gold rebounds on dollar drop; Chinese rates steady