Gold Holds Advance as U.S. Inflation Seen Taming Rate Concern

Higher rates could dent demand for non-interest paying bullion, while boosting the dollar. Prices jumped as much as 1.3 per cent to $US1,133.93, the highest since September 3.

Gold surged 70 percent from December 2008 to June 2011 as central banks increased money supply on an unprecedented scale, spurring concern that inflation would quicken. Investors have snubbed precious metals as job growth boosted speculation that the Fed was ready to lift rates, even as inflation remained below the central bank’s target.

“If rates were to be raised, then it would be no surprise to see gold prices sink quite quickly to $1,077”, said Howie Lee, an analyst at Phillip Futures.

Industrial production, which measures output at factories, workshops and mines, rose 6.1 percent year-on-year, the National Bureau of Statistics announced, describing the sector as still weak.

In a Reuters poll of 80 economists, 45 said the Fed would keep its benchmark interest rate between zero and 0.25 percent, while 35 expected a hike. “Fed comments about global market volatility and global economic risks are also supporting, likely, safe-haven flows into gold“.

The Fed’s resistance to raising rates can “undermine confidence” in the economy, Paul Sacks, a portfolio manager at Aurum Options Strategies in New York, said before the policy statement was released.

The Fed begins a two-day policy meeting on Wednesday at which it will decide whether or not to raise interest rates for the first time in almost a decade.

“Gold continues to trade in a very narrow range ahead of the Fed announcement”, agreed a note from the commodities team at ICBC Standard Bank, “though the United States inflation figures…appeared to trigger a rally in silver…and lent gold some support too”.

These two graphs from independent research house Capital Economics shows based on the correlation between gold and the dollar and gold and bond yields, the metal still has plenty of upside.

Gold discounts in India, the world’s second-biggest consumer, widened this week as dealers struggled to offload stocks amid sluggish demand. As of Wednesday, the metal had tumbled more than 40 percent from a record $1,921.17 reached in 2011 after some investors lost faith in bullion as a store of value.

“The later the Fed starts hiking, the more the weakness in gold prices will be shifted towards next year“, said Georgette Boele, an ABN Amro analyst.