NEW YORK (TheStreet ) -- Gold prices were clinging to higher prices Wednesday, shaking off a weaker euro, as strong physical buying from China boosted sentiment.
Gold for February delivery was adding $7.20 at $1,638.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,648 and as low as $1,630.80 an ounce while the spot price was up $6, according to Kitco's gold index.
Gold had staged a solid rally in overnight trading, up as much as $18, but prices were giving up gains as the euro faltered. The European Commission said Hungary, which is trying to get bailout money, has not taken enough sustainable moves to tackle its ballooning deficit. Ten year borrowing costs for the country were rising more than 9%.
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Although Germany successfully borrowed 3.15 billion euros at a lower yield to strong demand, investors seemed to be cautious headed into bond auctions from Italy and Spain at the end of the week. Ratings agency Fitch also said that the European Central Bank should do more to help Italy and prevent a "cataclysmic" collapse of the euro. The ECB is set to meet Thursday to discuss interest rates. All the negative headlines were weighing on the euro and perhaps putting a cap on gold prices. Profit takers also stepped in to take advantage of gold's 1% rally this week.
Evidence of strong buying from China was propping up the metal. The country imported a record 103 tons of gold from Hong Kong in November, up 19% month-on-month and a 483% increase year-on-year, according to Goldcore, a bullion dealer. China has imported 389 tons of gold in the first 11 months of 2011. Expectations were for imports of 400 tons, according to the World Gold Council, but with China ramping up buying that target looks easy to surpass. China's New Year celebration kicks off at the end of the month and consumers could be buying ahead of the festivities.
"As Chinese people's disposable incomes gain and concerns grow over inflation and equity and property markets, Chinese consumers and investors are turning to gold as a long term investment hedge," says Goldcore in a recent note.
For only the fourth quarter since 2003, Chinese jewelry demand outshined Indian demand in the third quarter. The country represented 28% of global jewelry buying. High inflation has helped currently at 4.2%.
Many analysts are expecting prices in China to fall in December, which could trigger more monetary easing. The People's Bank of China is currently holding rates at 3.5%, but the central bank could lower interest rates or cut the amount of money banks must hold in their reserves in order to pump more money into the system.
"A benign Chinese Consumer Prices Index [reading] this Thursday should trigger interest rate cuts and support the rally in risky assets," says Canaccord Genuity. Gold typically does well in high inflation loose monetary environments as investors become worried about the strength of paper currencies and head into hard assets like gold.
China's growing middle class is also creating a consumer base to buy gold. By 2015, 44% of China's population will be middle class. The average minimum wage has soared 20% from 2009 to 2010, household income is growing 9% a year while consumption is growing 11%, according to Credit Agricole Securities and Wells Fargo.
Gold mining stocks closed higher Tuesday. Barrick Gold(ABX_) added 1.3% at $48.33 while Newmont Mining(NEM_) jumped 1.9% at $62.65.
Other gold stocks, Goldcorp(GG_) and NovaGold (NG_) closed higher at $45.11 and $9.19, respectively.
