Just like oil futures, gold prices edged up today after falling heavily amid a surge in the US dollar on Tuesday.
The American currency was buoyant after China unexpectedly decided to hike its benchmark interest rate by 0.25% yesterday, spurring a wave of safe haven buying that drove the US dollar up 1.6% against a basket of other major currencies.
The move is seen as China’s latest attempt to keep the rising consumer prices under control, also hurting gold’s appeal as an inflation hedge.
In addition to that, US Treasury Secretary Timothy Geithner spoke against devaluing the US dollar to improve the country's trade balance, while reiterating that China's yuan was significantly undervalued.
Last week it was reported that the US trade deficit jumped from US$42.6 billion in July to US$46.3 billion in August. The total value of goods imported from China continued climbing and the trade deficit with that country rose from US$25.9 billion to US$28 billion.
While demand for the US dollar increased, investors started dumping another safe haven asset gold, which has recently posted fresh all time highs amid anticipation of further quantitative easing from the US Federal Reserve.
The US dollar index, which measures the greenback’s strength against a basket of six other major currencies, declined 0.2% today, helping gold reclaim the US$1,340/oz level.
Demand from bargain hunters provided more support for gold, but this was not enough to put it anywhere close to the record price of US$1,387/oz set last week.
Goldman Sachs (NYSE:GS) and UBS (NYSE:UBS) have recently upped their target prices for gold.
The Swiss bank has raised its average price forecast for gold from US$1,205/oz to US$1,228/oz for 2010, from US$1,295/oz to US$1,400/oz and from US$1,175/oz to US$1,250/oz for 2012, while Goldman tipped the yellow metal to reach US$1,650/oz within 12 months.
Spot gold stood at US$1,341/oz in mid afternoon. Silver and platinum reached US$23.78/oz and US$1,675/oz respectively.
Major mining stocks were mixed. Platinum miner Lonmin (LON:LMI) climbed 1.5% and silver miner Fresnillo (LON:FRES) added 1%, while gold producers Randgold Resources (LON:RRS) and African Barrick Gold (LON:ABG) declined marginally.
Likewise, midcaps were mixed. Aquarius Platinum (LON:AQP) added 1%, while gold miner Petropavlovsk (LON:POG) was flat and silver producer Hochschild Mining (LON:HOC) slipped 3.4%.
Gold producer with operations in Africa Goldplat (LON:GDP) was among the top risers in the sector with a 6.5% climb.