By Myra P. Saefong & Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- Gold futures tallied mild losses Friday after U.S. inflation data for January proved tamer than expected and as traders digested the Federal Reserve's surprise step towards normalized lending.
The Labor Department estimated core consumer prices fell 0.1% in January, the first such decline since 1982. Read more about the indicator of underlying inflationary pressures.
The report weighed on the dollar, as low inflation means there is less of a need to hike Fed Funds rates just yet, "and might help bullion on the day, at least before book-squaring rituals become manifest later," said Jon Nadler, senior analyst at Kitco Metals Inc.
In early trade on the New York Mercantile Exchange, gold for April delivery was off $4.7 at $1,114.0 an ounce, off its intraday low of $1,099.30 an ounce.
The contract had ended with a loss of $1.40 in New York Thursday after touching a low of $1,098.10.
Prices had come off their lows by the close of Thursday's trading session as investors picked up on thinking that central banks would likely buy the remainder of gold being sold by the International Monetary Fund, which on Wednesday said it plans to sell 191.3 tons of gold on the open market. See Thursday's metals story.
The IMF gold sales news is "not new news," said Peter Grandich, a metals writer at Agoracom.com, in a note to clients late Wednesday.
"Even if this doesn't lead to someone or group buying part or all of the proposed amount, it's my understanding that the amount is going to be part of the already known agreed-upon amount the Washington Accord group had in its powers to sell anyway," he said.
And the IMF sales, "which have been less than what many first thought they would be anyway, have become almost non-factors," he said.
Fed surprise
Then, late Thursday in Washington, the U.S. Federal Reserve surprised financial markets by lifting the lending rate it charges banks. See story on U.S. fed move.
The Dollar Index (DXY 81.05, +0.65, +0.81%) , which tracks the greenback against a trade-weighted basket of six major currencies, was at 81.08, up from 80.38 ahead of the Fed move. See currencies story.
Gold's decline Friday in Asia is a "knee-jerk reaction" following the surprise rate move after New York markets closed, said Patrick Kerr, a managing director at Amerifutures Commodities & Options, adding that these after-hours trading markets "have nowhere near the liquidity [or] volume of regular Comex pit session" and that exacerbates the move.
"Once the market digests this, maybe tomorrow morning N.Y. time or so, we could see a huge rally late in the day or early next week," he said.
"This is the so-called 'boogey-man' that was going to crush gold [but it's] still above $1,100," he said. "Now that folks see that a rate increase didn't demolish gold, the boogey man doesn't seem so scary anymore so it's full speed ahead."
For now, gold futures prices traded at their lowest levels in a week.
Going forward, "since the budget deficit problems in most countries of the euro zone, as well as the U.K. and the U.S., have been anything but fixed, and are likely to lead to a sovereign debt crisis followed by high inflation, the outlook for gold prices remains very positive," said Martin Hennecke, an associate director at Tyche Group Ltd. "The metal will likely be increasingly sought after again as a hedge against inflation and financial crisis."
Grandich's 2010 target for gold prices is $1,300 to $1,500 an ounce.
"Mark this time down," he said late Wednesday following the IMF news. "It will, in the not-too-distant future, be viewed as yet another buying opportunity in the 'mother' of all secular bull markets."
