Gold prices hit a two-week high on Wednesday, extending the previous session's 1.3 percent rise, as a rate hike from China put inflation concerns back in the spotlight, and as worries over euro zone and US debt lifted the metal's haven appeal.
Spot gold was bid at $1,526.81 an ounce at 15:43 SA time, against $1,515.70 late in New York on Tuesday, having fallen as high as $1,509.49. US gold futures China's central bank increased interest rates for the third time this year, by 25 basis points, making clear that taming inflation is a top priority even when as the economy slows gently.
“China has done a number of reserve requirement increases over the last several months - however, you have climbing inflation, so in real terms you are not making any money by just holding cash,” said VM Group analyst Carl Firman.
“A lot of new middle-class Chinese have cottoned on to this, and there is a lot of demand for gold as a store of wealth under these circumstances. Their money is not earning anything, in fact you are getting negative returns now holding cash, whereas you are not getting that holding gold.”
“I think China would need to raise rates higher and higher still until we start to see some kind of tapering off of their inflation figures,” he said.
The euro extended losses after China raised rates, pushing the dollar index to session highs. Usually this would weigh on gold, but the assets are currently moving in line.
“The stronger dollar could stall a prospective rally if there is a flight to safety... but then you will witness again what happened in 2009, when the correlation between the dollar and gold was positive,” said Firman. “That could very well manifest itself over the next couple of months.”
The metal is also taking support from concerns over euro zone debt after Moody's cut Portugal's credit rating to junk status, and an upcoming debate on raising the US debt ceiling.
“The issues surrounding the euro zone are going to last for quite some time, so they are something that markets are going to have to be dealing with on an ongoing basis,” said Macquarie analyst Hayden Atkins.
Bonds issued by the euro zone's weaker countries came under intense pressure on Wednesday after the Moody's cut, which raised fears Portugal would also eventually be pushed into a debt restructuring.
ECB MEETING AWAITED
Traders are closely watching the ECB's policy meeting on Thursday. The bank is set to lift euro zone interest rates to 1.5 percent and to show no sign of softening its stance that Greece must not default on its debts.
Expectations that the ECB will hike rates more quickly than the Federal Reserve have helped lift the euro more than 7 percent against the dollar so far this year, supporting gold.
From a technical perspective, the precious metal is facing tough resistance after its latest break higher.
“We see resistance at $1,518 and $1,528 which represent the 50 percent and 61.8 percent of our June drop from $1,558 to $1,479,” said ScotiaMocatta in a note.
“We believe the market will maintain its bearish slant while the metal holds below $1,518 but will shift neutral on a close back above that level.”
On the supply side of the market, investors were awaiting fresh developments in a strike in Freeport-McMoran's Indonesia mine as well as the threat of a strike in South Africa's main gold mines.
Silver was bid at $35.87 an ounce against $35.45, spot platinum was bid at $1,734.24 an ounce versus $1,737.05, and spot palladium at $773.47 an ounce against $770.38. - Reuters