US gold futures turned higher on Wednesday, changing course from early declines as they tracked US bond prices, the dollar, and the inflationary implications of higher-than-expected US retail sales and import price data, traders said.
"Interest rates are totally driving this. The last two to three days gold has been predominantly following the US interest rate market. With market forces taking interest rates up without central bank action, you are starting to look at liquidity issues," said Frank McGhee, head precious metals trader at Integrated Brokerage Services Llc in Chicago.
As bond prices rise, yields fall. But gold traders generally fear that a higher interest rate scenario will slow the investment demand for gold. Most-active gold futures for August on the COMEX division of the New York Mercantile Exchange rose $2.40 to $655.50 an ounce, in a range from $647.00 to $656.90.
As real domestic and international rates rise, McGhee explained, liquidity begins to tighten, lifting the dollar. Inflationary implications from two US economic reports on Wednesday guided both gold and bond prices.
US Treasury securities prices rose on Wednesday on a bout of short covering, reversing brief losses tied to surprisingly strong US economic data that fanned worries the Federal Reserve may raise interest rates to curb inflation. Gold reacted in tandem with US government bond prices, first falling then reversing course to turn higher in a short-cover rally.
Higher-than-expected US retail sales and import prices exacerbated investor concerns that the Federal Reserve might have to raise interest rates next year to stave off inflation. Sales by US retailers rebounded in May by a stronger-than-expected 1.4 percent. Consumers shrugged off gasoline prices and increased spending on cars, clothing and building materials.
The rise was the biggest monthly gain since January 2006 and was far stronger than the 0.6 percent increase predicted by Wall Street economists in a Reuters poll. "Retail sales looked stronger than expected in May and its probably going to lift estimates on second-quarter GDP growth. Non-petroleum import prices are up 2.8 percent year on year and it was 2.9 percent a month ago. The Fed is nervously watching various manifestations of inflation, import prices are one of those," said Pierre Ellis, senior economist, Decision Economics.
COMEX estimated 10:00 am EDT gold volume at 35,023 lots. Spot gold increased to $650.20/1.70 an ounce, up from $648.30/9.80 per ounce late Tuesday. London banks lifted the gold fix to $647.65 an ounce. COMEX July silver rose 6.0 cents to $13.15 an ounce. The range spanned $12.8450 to $13.20 an ounce.
Spot silver changed hands at $13.10/3.14 an ounce, higher than the $13.06/3.09 traded late Monday. The London silver fix dropped to $12.86 an ounce. NYMEX July platinum lost $10.40 to $1,286.0 an ounce. Spot platinum as seen at $1,280/1,284. September palladium fell $2.10 to $370.75 an ounce. Spot palladium was unchanged at $366.0/370.0.