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Gold Prices Rise on China Inaction

Stocks in this article: NG

NEW YORK ( TheStreet) -- Gold prices rose Monday on high inflation numbers and continued low interest rates in China.

Gold for February delivery added $13.10 to $1,398 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,400.20 and as low as $1,380.80 during Monday's session.

The U.S. dollar index was slipping 1.05% to $79.22 while the euro was adding 1.44% to $1.34 vs. the dollar. The spot gold price Monday was up $11.30, according to Kitco's gold index.

Inaction and high inflation in China were helping gold prices Monday. On Saturday, the country reported that inflation in November jumped to a two-year high of 5.1%, dragging year-on-year growth up to 9.6%. The number was widely expected but so was an interest rate hike, which never came.

At an annual economic policy meeting over the weekend, officials promised a more "prudent" economic policy targeting certain areas for growth and tempering inflation. The expectation is that China will be forced to raise interest rates but officials are putting off this move in order to keep its local currency low for as long as possible.

The delay only adds to negative high interest rates in the country which is a perfect storm for gold prices.

Real interest rates are the interest rate minus the inflation rate. According to reports, one-year deposit rates in China are 2.5% and with inflation at 5.1%, the real interest rate is negative 2.6%.

Gold becomes attractive when rates are negative because the yuan is literally worth less. If real rates are at negative 2.6%, money is being valued at a lower rate gold becomes a safer place to preserve wealth.

China did raise the amount banks must hold in their reserves by 50 basis points Friday to fight inflation, but the move is the sixth time this year and isn't expected to take enough money out of circulation to tame growth.

The "increasing inflation pressure in China creates a positive environment to future bullion gains with the metals to remain underpinned by dip-buying," writes James Moore, analyst at thebulliondesk.com in his daily metals report.

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