Gold continues to gradually retrace last week's losses, notching a fourth consecutive higher daily close. The yellow metal is trading just below the midpoint of the recent range, which is a mere 2.5% off the early-January cycle high at 1611.41.

Gold continues to be buoyed by coronavirus inspired safe-haven interest. And surprisingly, the yellow metal may also be garnering support from rising inflation in China.

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One of the headwinds that have limited the upside in gold in recent weeks is the expectation that weak Chinese demand was going to have a deflationary impact on the global economy. Today the data showed inflation continues to heat up.

China’s consumer price index rose 5.4% in January, versus +4.5% in December. That's up from 3.8% in October and 3.0% in September.

With much of the country hunkered down in an effort to prevent the spread of the virus, China is seeing significant supply chain disruptions. This is driving up the prices of available goods.

Food prices were up sharply again in January, surging 20.6% YoY, versus 17.4% in December. Pork prices alone were up a whopping 116% as Asia continues to deal with the swine flu as well.

As you might imagine, the one-week extension of the Lunar New Year holiday and perhaps some reluctance of transport workers to travel into cities has the potential to lead to food shortages and indeed higher prices. Persistent food price inflation creates the risk of political unrest, so I'm sure Beijing is closely monitoring the situation.

The dollar is also catching some haven flows, setting fresh 17-week highs. However, gold seems to be largely ignoring the strength in the greenback, providing evidence that the underlying uptrend in the yellow metal remains intact.

President Trump presented a massive $4.89 trillion budget to Congress today. While there is little chance it will be passed in its present form, it should bring to mind deficits in excess of $1 trillion that will likely be seen moving forward.

Mounting debt and deficits have been largely ignored by U.S. markets in recent years. With the debt ceiling suspended until after the presidential election, that is likely to continue. However, it does create some pressure on the Fed to keep rates low.

Overall, I like the way gold has been performing since the cycle high was set about a month ago just above $1600. Continue to look for buying opportunities on dips into the lower third of the range.


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