China hikes rates and precious metals are up!

The People's Bank of China said in a brief statement that it would raise the one-year deposit and lending rates by 25 basis points each, taking the rates to 3.0 percent and 6.06 percent respectively. This is the third time in four months in an effort at reducing liquidity which has caused broad based inflation.

China's consumer price index (CPI), a key measure of inflation, rose 4.6 percent year-on-year in December, down from 5.1 percent in November, which was the fastest rate in more than two years.

Typically an interest rate hike would drag on gold. As paper money gains more value, gold becomes a less appealing place to put money. Gold also does well in a negative interest rate environment, which is the interest rate minus the inflation rate. Using the one year deposit rate, even with the hike, China still has a negative rate of 1.6%.

This is why gold is, as of now, up US$18 an ounce or 1.34% to US$1,365.60 an ounce despite China's decision to raise key interest rates.

Silver is up as well and is now US$29.97 an ounce.

References:
1. channelnewsasia.com dated 08 February 2011 1905 hrs
2. The Street dated Tuesday February 8, 2011, 9:18 am EST