Gold takes advantage of PBOC rate hike

The PBOC made good on its previous promises to combat inflation by hiking its key interest rate overnight to 6.06% effective as of tomorrow. The central bank also raised the 12-month yuan deposit rate by a similar quarter percent, to 3%. The lifting of rates came on the heels of similar anti-inflationary moves that the PBOC undertook in October and December of 2010.

The US dollar declined to 77.87 on the trade-weighted index in the aftermath of the Chinese rate adjustment, and gold speculators saw this as an opportunity to lift the precious metal by nearly one percent shortly after the New York market had opened with a minor, $1.80 per ounce loss at the $1,350.00 level. As well, the (logical) initial reaction in gold overnight was to experience some more profit-taking type of selling. Rising interest rates (headline, or real) might not be as conducive to further gains in commodities as some hard money propagandists would have us believe.

Curiously ‘lost’ in the news on Monday were remarks made by ECB Governing Council member Yves Mersch. The comments were related to the sharp rise in commodities’ prices. Mr. Mersch noted that: “if the commodity price push should lead to second-round effects that leave inflation at an excessive ‘plateau’ and risk destabilizing inflation expectations, there will be a ‘rigorous reaction’ from monetary policy, he assured.”

“The ECB has always said that price stability has "absolute priority" and it has always taken the necessary steps to fulfill its mandate.” Mr. Mersch then added a new ‘wrinkle’ to the interest rate hike equation, by cautioning that “the ECB's ongoing liquidity-support measures [would not] prevent it from tightening monetary policy, if necessary. We can hike interest rates without having exited “from non-standard measures.” Digest that, for a moment.

By contrast, it appears for now that Mr. Bernanke and his central bank (along with investors, apparently) are counting on inflation not getting out of hand because of spiking food, energy, and metals prices. This, even if the current year may witness a short-term rise in prices because of such pressures. While ‘headline’ inflation is starting to have a (rather subtle) effect on the Fed’s monetary policy, its focus on core inflation and the apparent desire to record US economic growth rates at above 3.5% is leading to some bets that it will not raise rates very soon, even if it might soon alter the language it used last month when it alluded to “downward-trending inflation.”

Trading-room “shop talk” from New York this morning indicated that gold specs were hoping that tomorrow’s return of Chinese traders would offer additional reasons for the metal to gain in value. Stay tuned. The yellow metal is in “recovery mode” following several weeks of declines and market technicians envision a possibility of it revisiting the $1,370-$1,400 range if the current rebound exhibits ‘legs’ (read: if it is able to maintain closings above $1,360.00 for a few sessions).

After the first hour of trading in New York the snapshot price check indicated gold ahead by $10.00 an ounce, at $1,362.1o on the bid-side. CFTC data continued to reveal that speculative interest in gold bullion is still waning – to the benefit of other, apparently more ‘attractive’ metals. The shrinkage in long gold positions (10,500+ contracts lost in the latest reporting week) continued for a fifth week last week, despite the apparent recovery in bullion values.

Where did some of the interest flow? Well, some of it went into silver, (though the increase in long positions could be chalked up to short-covering as opposed to new buying), and – no surprise – to platinum and palladium (not to mention copper). Better fundamentals yield better positioning.

Silver was up by 27 cents this morning, quoted at $29.71 per ounce, and platinum was higher by $8.00 at $1,847.00 the ounce. The Austrian Mint announced that it will not produce five and ten ounce silver coins this year “because of the high price” (read: we weren’t going to sell too many of those, at these lofty levels). Palladium climbed $6 to reach $822.00 and rhodium remained static at $2,450.00 per troy ounce. On the losing side this morning, crude oil fell $1.28 to the $86.20 per barrel mark, and copper declined 0.5% to near $4.50 at last glance.

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