Inflation Puts Shine Back On Gold

Inflation worries have put some shine back in gold, and the trend could continue in the short term.

"Most of what's going on has to do with the validation of inflation. The Chinese have validated it for us," said George Gero, vice president with RBC Capital Markets Global Futures.

China said early Tuesday it was raising its lending and deposit rates by a quarter point, in a bid to fight inflation. The People's Bank of China raised the benchmark rate to 6.06 percent, effective Wednesday.

Gold was up $15.80, or more than 1 percent Tuesday, to settle above $1,363.40 an ounce, its highest close in three weeks, as the U.S. dollar slumped and the euro strengthened. Silver rose 3.2 percent to $30.27 per ounce. Copper initially traded lower but reversed course, gaining $0.05 per pound to $4.57.

Gero said gold's breach of $1350 to $1360 drew in momentum buyers. At the same time, investors covered short positions.

"Silver is a bridge between investment demand and industrial demand, and I think getting silver over $30, which we've just managed, is technically very helpful to the bulls," he said. His target for silver is $35 at year end, and for gold, he expects $1,400.

Gold is also supported by continued concerns about unrest in Egypt.

"On top of everything else, J.P. Morgan validated the use of gold as collateral," Gero said. While not a new idea, it drew interest in the metal. "It points the finger to the fact that gold is another currency, and we've known that for a couple years."

Copper, meanwhile, ended nearly unchanged. It initially sold off on concerns that China's tightening would cool demand.

"There's a little strength in the euro today, but also I think copper is well supported. The market isn't selling it off," said Justin Lennon, an analyst with Mitsui Bussan. "They were initially worried that the interest move would put a crimp in Chinese demand for copper, but I'm not sure that's the consensus or that it's clearly evident that the two are necessarily correlated."

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