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Global Inflation Concerns Support Gold Prices

Release Date: 
Wednesday, May 11, 2011

Gold prices trended lower on Monday, despite reports of a softening dollar and prospects of greater demand for the metal from China on inflation data. Longer term, analysts at Investec Australia, MKS Finance, Standard Bank and Mitsubishi cited global inflation fears, investor confidence in the metal and debt issues in the European Union as supportive of higher prices later this year.

Inflation in Germany accelerated more than initially estimated in April, data showed today. "Signs of continued pressures might see the market's preoccupation with rising global inflation resurface, and consequently see some inflation-hedge demand," wrote Marc Ground, an analyst at Standard Bank Plc, in a report. "With the resurfacing of euro-zone sovereign-debt concerns, we expect to see continued appetite for gold and silver."

"We still have unresolved issues with the euro zone," said Bernard Sin, the head of currency and metal trading at MKS Finance SA, a bullion refiner in Geneva. "In the long term, it may be sensible to hedge against inflation with gold. Physical demand is extremely good" from India, he noted. "Gold is generally benefiting from the return of confidence from investors," said Darren Heathcote, head of trading at Investec Australia. "They are very happy buying on the dip, as we see the same old problems hanging around."

Inflation in China rose in April, with consumer prices up 5.3 percent from one year earlier, above government targets of 4 percent. China, the world's second largest consumer of gold and second largest economy, is seeing higher inflation and slowing growth, which could boost demand for gold, which may help investors protect against rising price pressures, concern over economic fragility and currency vulnerability.  China has raised interest rates four times since October to slow its aggressive growth.

"The markets greet high inflation data with gold going up because it acts as a hedge against inflation, but sometimes they greet it by going down because of the fear of rising interest rates," said Mitsubishi analyst Matthew Turner. However, a prominent Chinese government economist said the central bank may cut rather than raise rates over the course of the year as it seeks to stave off a more protracted economic slowdown. "The underlying trend hasn't changed in gold, and last week's decline looks almost like a blip," Turner said. "The outlook is still based around 'do governments have a plan that isn't currency devaluation and low interest rates'?"

(Sources:  "Gold May Climb on Chinese Inflation Figures, Concern About European Debts," Boomberg, May 11, 2011 "Gold Set for Fourth Day of Gains, China in Focus," CNBC, May 11, 2011; "PRECIOUS-Gold off highs but still firm after China data," Reuters, May 11, 2011)

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