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Gold Shrugs off China's Rate Hike, Bounces to $1,380

Release Date: 
Monday, December 27, 2010

GOLD PRICE NEWS - The gold price hovered near unchanged at $1,383 per ounce after falling overnight on concerns over tighter monetary policy in China. The price of gold fell as much as 1% last night after the People's Bank of China (PBOC) surprised markets with a weekend rate hike. The bulk on the commodity complex came under selling pressure Monday morning with 15 of the 19 components of the Reuters/Jeffries CRB Index trading lower. Gold's sister precious metal, silver, followed the gold price to the downside as it declined to $29.15 per ounce.

The 25 basis point hike from the PBOC in both the lending and the deposit rate comes following a series of elevated consumer price inflation readings, as well as a spike in property prices. Chinese policy makers are becoming more aggressive in their fight against inflation, hiking rates for the second time in the past three months. Abundant liquidity has helped fuel the gold price, as well as the broader stock and commodity markets, over the past 18 months. Tighter money in emerging markets such as China could represent a headwind to asset prices in 2011.

A contrary take on the PBOC's decision - one with bullish implications for the gold price - is that with China turning more hawkish, the Federal Reserve will seek to make up for the reduction in global liquidity. The Fed may be more likely to expand its quantitative easing (QE) program, an option it discussed at its FOMC meeting earlier this month. While emerging nations may be concerned with budding inflation pressures, most of the developed world is still mired in a battle with deflation. As long as Chairman Bernanke is committed to fighting deflation, the gold price will have a tailwind at its back.

While a number of key U.S. economic data over the past few months has beaten economists' expectations, it has yet to convince the Fed to reduce its unprecedented levels of monetary stimulus. In the latest Fed minutes, the U.S. central bank noted that while the economic recovery has "proceeded at a modest rate in recent months," there has only been a "gradual improvement" in the labor market. Furthermore, the FOMC has repeatedly focused on the fact that the residential housing market has "remained depressed." As long as Chairman Bernanke and the Federal Reserve continue to express a cautious outlook on the economy and err on the side of loose monetary policies, the backdrop for the gold price will remain favorable.

Looking ahead to the upcoming week, the economic calendar is relatively light. However, there are a few key reports scheduled that may impact the gold price. On Tuesday, the monthly Case-Shiller 20-City Index on U.S. home prices, as well as the Conference Board Consumer Confidence figure for December will be released. On Thursday, data on weekly jobless claims, the Chicago Purchasing Managers' Index for December, and Pending Homes Sales for November will be announced.

Article provided by GoldAlert.com.


This article is independently provided by GoldAlert.com and does not represent the views or opinions of Goldline International, Inc. Although the information in this article has been obtained from sources believed to be reliable, Goldline does not guarĀ­antee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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