2011-10-19

Higher than expected reading on inflation gave traders a key reason to sell investments tied to the gold price

The gold price sunk $14.98 to $1,655.54 per ounce Tuesday morning after a key reading on U.S. inflation came in substantially above expectations. The price of gold hovered near $1,660 in overnight trading, but dropped to as low as $1,634.90 after the Labor Department reported that the Producer Price Index (PPI) rose 0.8% on a seasonally adjusted basis. The gain was noticeably above the 0.4% consensus estimate among economists, and marked the largest monthly increase since April of this year.

The higher than expected reading on inflation gave traders a key reason to sell investments tied to the gold price, as higher inflationary risks are likely to reduce the likelihood of further monetary easing from the Federal Reserve. The core PPI rate, which excludes food and energy costs, came in at 0.2%, above the 0.1% rise expected by economists. The U.S. dollar inched higher against a basket of foreign currencies following the PPI data, which also helped to pressure the price of gold.

Steffen Seibert, a spokesman for German Chancellor Angela Merkel, stated that while an enhanced set of measures will be agreed upon at the European Union summit on October 23, the benefits of such plans will take quite some time to materialize. The measures discussed are “important steps on a long journey,” Seibert contended, “a journey that will certainly continue well into next year.”

Investors used the comments, along with last week’s rebound in stocks and commodities, as sufficient reasons to liquidate positions on Monday. As for the gold price specifically, UBS analyst Edel Tully wrote in a report to clients that “Too much uncertainty remains in the market with questions over issues such as guarantees of European sovereign debt, a Greek default and debt sustainability.”

However, Tully went on to offer a more neutral short-term outlook on the price of gold. Although “there is no rush to buy gold here, it is equally clear that investors who are long the yellow metal are not willing to let go of holdings either,” she contended.

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