Gold up mildly following selling sessions

The US dollar traded at a near two-month high overnight eating into gold’s attractiveness as a substitute holding and prompting some additional long liquidation in the metal. Lows in bullion prices during the evening hours were recorded near $1,330.00 per ounce as some participants opted to book profits following several days of declines without a turn-around. Pre year-end book-squaring, thinning player participation and “window-dressing” efforts may make the type of volatility in this market a feature to have to live with for the next six weeks.

Gold prices opened mildly higher following three brutal sessions of incessant selling. Spot gold was quoted at $1,342.70 per ounce – a gain of $3.30 – amid light, scattered buying. Traders will focus on US CPI data (showing core inflation flat for a third straight month, in a continuing case of “what inflation?”) and on housing starts numbers (down to an 18-month low, but permits showed a gain) before the action gets underway in the Dow. Sino/Irish jitters sent the equity index tumbling on Tuesday; it ended with a 178-point loss. Once again, the stand-out trading feature is the correlation in…everything that tracks the dollar’s gyrations. Thank you, Fed.

Silver started the midweek session with an 18 cent gain and a spot bid quote of $25.61 the ounce. Platinum was down $2 (at $1,639.00) but palladium was higher by the same amount (at $644.00 the ounce) while rhodium was off $40 with a quote per ounce at $2,350.00 this morning. Crude oil did not manage to show gains however; it was down 34 cents at the round figure: $82 per barrel. Copper lost 1.3% in early trading. Blame the dollar, blame China.

Most of the US dollar’s gains came on the heels of still-present apprehensions about China’s current and future actions intended to stave off higher inflation levels and on mounting worries that Ireland’s debt woes will depress the European common currency any further (they have already pushed the euro to seven-week lows against the US currency). Commodities have been ultra-sensitive to the US dollar’s movements; first, in the wake of QE2, and now, amid signs that the greenback has some room to run given current global realities.

At the moment, there are definitely some who question whether the rebound in the US currency is transitory, or the beginning of the undoing of the reflation trade that blossomed since Mr. Bernanke first hinted at QE2 back in August.

What is not in doubt is the fact that the Fed’s actions have made possible a runaway gravy-train ride for most assets (even normally not correlated ones) up to this week. If only euphoric speculators had factored in the China...factor, or the fact that the Irish’ situation’ may play into the hands of those who loaded up on some dollars at near 77 on the index...

Indeed, China did take steps aimed at slaying the inflation dragon before it grows additional heads, this very morning. The government announced that it will activate measures limiting food price gains and distribute additional fuel supplies (whose prices are already under such limitations).

As for Ireland, the indecision continues. Dublin has not made any substantive gestures indicating a willingness to accept a rescue package from the EU/IMF. Will efforts to clean things up be limited to Irish banks, or will a broader measure be forced upon the entire nation? Stay tuned. It should only be a matter of days, if not hours. Meanwhile, the Fed – already under attack for its latest accommodation – is facing ‘incoming’ on the political front. Republican lawmakers have openly lambasted the US central bank. The recent GOP election victories may indicate that life for the Fed – going ahead – may not be all that pleasant.

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