GOLD PRICE NEWS - The gold price held above $1,105 as inflation data from China was unable to send the price of gold to its fifth consecutive daily loss. At $1,109 per ounce, the gold price is $25 lower on the week and $10 lower for the month of March. Following its worst day since February 4th, the gold price was unable to muster much of a rally in spite of a modest selloff in the U.S. Dollar Index to 80.280.

This week has seen China as the source of multiple headwinds for the gold price. On Tuesday, the head of China’s chief foreign-exchange regulator stated that gold is “unlikely” to be China’s primary asset class in which to diversify its $2.4 trillion reserve holdings. Meanwhile, today’s release of Chinese inflation data showed a rise in February to the highest level in 16 months. Consumer prices in China rose 2.7% year-over-year, above market expectations of 2.5%. In addition, the Chinese Bureau of Statistics also revealed that industrial production grew 20.7% in the first two months of 2010, its largest increase in over five years.

As inflation has heated up in China, investors have grown increasingly concerned that the Chinese government will further tighten monetary policy. The People’s Bank of China, the nation’s central bank, has already raised reserve requirements on banks several times in 2010, but some market strategists have recently suggested additional measures should be implemented to curb the inflationary effects of the country’s rampant credit growth. Under a scenario of tighter monetary policy, the gold price could stand to suffer due to both the rising opportunity cost of holding a sterile asset such as gold that pays no interest as well as the reduced liquidity flowing into assets in general.

However, with an inflation rate of 2.7% year-over-year, the annual rate of consumer price inflation has surpassed the benchmark one-year savings rate of 2.3%. Consequently, real interest rates have turned negative in China for both depositors and borrowers - a fact that should support the gold price.

As GoldAlert has written on numerous occasions, the gold price has historically performed well during periods of negative real interest rates due to the declining purchasing power of cash sitting in the bank. Negative real interest rates have historically been tied to gold bull markets. The longer real rates remain below zero and the quicker the currency debases, the more supportive the macro-economic backdrop becomes for a higher gold price.