Gold Remains Well Bid

by Peter A. Grant

February 17, a.m.
(from USAGOLD.com) --

Gold edged to new 5-week highs in early NY trading in the wake of a higher than expected US CPI print and a bigger than expected rise in initial jobless claims. Tensions in the Middle East have also ratcheted higher after police violently routed protesters in Bahrain and amid conflicting reports that Iran was sending warships through the Suez Canal bound for Syria.

Rising inflation fears were further stoked today when US headline CPI came in hotter than expected at +0.4% for Jan, driven primarily by food and energy. However, core-CPI was higher than expected as well. In fact, it was the biggest rise in core since Oct 2009. The pop in CPI came on the heels of yesterday's larger than expected increase in US PPI for Jan.

US initial jobless claims rebounded 25k to 410k for the week ended 12-Feb. This bigger than expected jump in claims comes amid reports that the Fed has asked the 19 largest US banks to stress-test their capital for a scenario that calls for a return to recession and unemployment of 11%. I'm sure the Fed would tell you this is simply a precautionary measure, but it would also seem to suggest that the scenario is indeed within the realm of possibilities and raises some doubts about the Fed's rosy growth forecasts.

Rumors circulated late yesterday that Iran was sending two warships through the Suez Canal. State run Iranian TV seemed to confirm these reports at one point this morning, followed by a report that the ships' canceled their request for transit of the canal, followed by a denial from Iran that the transit request had been canceled. Nonetheless, the Israeli navy is on a high state of alert. Whether the ships do pass into the Mediterranean Sea, or whether the Iranians are just playing games, it is a significant escalation of tensions in a region that is already quite tense due to recent political unrest.

Brent spot crude probed back above the $104 level in earlier trading, but has since backed off the highs. Recent gains in oil have factored heavily into rising inflation expectations.

News that ECB emergency overnight lending spiked to more that EUR15 bln, a 20-month high, added to uncertainty in Europe. Overnight lending tends to be less than EUR1 bln a day. One economist suggested that the "continued provision of unlimited liquidity and the desire to sterilise bond purchases may be in conflict." While the surge may have been the result of a one-off funding error, traders will be watching the emergency facility closely tonight to try and determine if some EU member state is truly in trouble.

Perhaps not coincidentally, the Portuguese paper Jornal de Negocios reported today that Germany has increased pressure on Portugal to accept an immediate bailout. Portugal on the other hand has flipped the story and instead is pressing the EU to reach an accord on the permanent bailout facility. The implication being, that if countries like Germany would stop dragging their feet on the EFSF, Portugal might not need a bailout.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.