Gold gains on slipping dollar and Chinese inflation

That which China did not do over the weekend (raise interest rates) provided fresh fuel for equity and commodities markets speculators for yet another day this morning. Although Saturday’s release of statistical data indicated that inflation is indeed gaining strength (it was reported at the highest level in two years’ time, at 5.1% in November) in the world’s second largest economy, the PBOC (for now) chose to remain mum on the subject of interest rates and opted to stick with the last round of reserve requirement hikes for banks, set to go into effect a week from today.

Copper capped $9,160 and rubber bounced to a record of its own while crude oil flowed unimpeded towards $90 per barrel. The return of risk appetite was naturally reflected in the precious metals’ complex on Monday morning as well. Gold opened with a $10.60 gain at the $1,396.40 mark as a confluence of fresh buying and a slipping US dollar added up to a good start for the week.

Thomson Reuters Metals Insider reported that “The euro trimmed losses against the dollar on Monday, helped by East-European and Latin-American demand but hampered by uncertainty about how the euro zone would deal with its debt problems” while also remarking that “trading volumes were reduced by the approach of the year-end, while few investors were willing to take on big positions before a Federal Reserve meeting this week and a European Union summit on Thursday and Friday.”

The trade will now await the release of a slew of US economic data (PPI, retail sales, housing starts, and LEI among them) commencing tomorrow and extending all the way into Friday. For today, the push will have to take place mainly on the absence of Chinese rate action –which, by the way, remains a manifest risk factor for the materials sector (and to some extent other risk assets as well).

The yellow metal recorded its largest weekly loss in one month last week, as concerns about the aforementioned proximity of an interest rate adjustment by China prompted a backing away from record price territory. Trading in gold and silver put options linked to the two largest precious metals ETFs rose to its highest level in about one month late last week, with the activity (volume) in gold put options exceeding that on the call options side for the first time in a fortnight, and for two consecutive days.

Data compiled by Bloomberg shows that approximately nine years’ worth of US gold mine output resides in various gold exchange-traded products’ warehouses. Meanwhile, Goldman Sachs reiterated its call for higher gold prices in 2011 – its analysts team was once projecting a $1,690 mark achievement in 12 months and a probable peak in 2012 – while also noting that “as we look toward 2012, we find it timely to reiterate our view that at current price levels gold remains a compelling trade, but not a long-term investment.”

Without rehashing the main tenets (heard them before) of the “Case Against Gold” (as you know, this writer staunchly recommends a ten percent ‘must-have’ weighting in bullion for ‘come whatever may’ scenarios) published in the Globe and Mail this weekend, there is one real potential ‘fly-in-the-ointment’ factor to glean from the lengthy piece. It revives an oft-shunned divergence pattern present in this market. David Berman relays that:

“Pierre Lapointe, global macro strategist at Brockhouse Cooper, noted that the ratio of the gold price to the U.S. gold stock index is about 6.5, which is well above the ratio’s historical average of 4.4 for data going back about 25 years. In other words, gold stocks haven’t been keeping up with the price of gold, creating a confounding divergence. “Such a divergence can be interpreted two ways. On the one hand, it could mean that gold stocks have yet to reflect the increase in the underlying commodity,” Mr. Lapointe said. “On the other hand, it could mean that the commodity has overextended its rally and that stock investors do not believe the bullion rally has legs.”

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