May 11, 2011

Gold, Silver Rise on China News

Inflation higher than expected in April; growth slowed

News from China fueled the rise for the fourth day in a row in gold prices, while silver looked to be heading for its strongest weekly gains in two years. Figures released Wednesday by China showed that April's inflation rate was higher than expected, at 5.3%, and industrial output was lagging.

Reuters reported that spot gold added 0.6% to $1,523.80 per ounce in early morning trading in Europe, while COMEX June gold futures rose 0.5% to $1.524.00. Demand was strengthened by the prospect of rising prices and slowing growth. Spot silver was also in line for a fourth day of gains in a row after a 20% drop last week, gaining as much as 2.7% to $39.48 before falling back a bit to $39.16. COMEX silver also gained, adding 1.8% to $39.18.

A Chinese government economist was cited in the report saying that the central bank may lower interest rates instead of further raising them as the year goes on, to ward off additional economic slowing. Currently real interest rates in China are at approximately 1%, with inflation factored into the benchmark rate. This compares with a rate of -2.45% in the U.S., -1.55% in the euro zone, and a rate within the G20 that averages -0.4%.

Darren Heathcote, head of trading at Investec Australia, was quoted as saying, "Gold is generally benefiting from the return of confidence from investors. They are very happy buying on the dip, as we see the same old problems hanging around." Gold ETFs have not benefited from this trend yet, however; on the other hand, iShares Silver Trust saw its holdings hit a one-week high on Tuesday as bargain hunting kicked in. Platinum and palladium were both up as well, adding 0.2% and 0.7%, respectively.

Mitsubishi analyst Matthew Turner said in the report, "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. The underlying trend hasn't changed in gold, and last week's decline looks almost like a blip," he added. "The outlook is still based around 'do governments have a plan that isn't currency devaluation and low interest rates'?"

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