Gold steady on China inflation; euro softens

Gold held steady above $1,730 an ounce on Thursday, after dropping about a percent in the previous session, as a surprisingly high China inflation number supported prices, while investors also focused on Greece's debt talks for direction.

Gold came under pressure as the euro softened after Greek political leaders failed to conclude a deal for a bailout package crucial to avoiding a messy debt default, but the higher-than-expected inflation data out of China helped bullion pare early losses.  

"Once the higher CPI (consumer price index) came out, inflation worries prompted traditional buyers to come in quickly," said a U.S.-based trader.

Spot gold was little changed at $1,733.59 an ounce by 0323 GMT, recovering from an intra-day low of $1,725.49. US gold edged up 0.3 percent to $1,736.40 an ounce.

China's annual inflation rate accelerated to 4.5 percent in January, well ahead of market expectations and breaking a five-month trend of easing price pressures as consumers ramped up spending during the Chinese Lunar New Year holiday season.  

The inflation data may temper hopes of aggressive easing by China's central bank in the near term, but many economists expect inflation to ease February onwards, leaving China's policy of targeted monetary and fiscal easing intact.

Gold is seen as a good inflation hedge and benefits when accommodative monetary policies raise inflation outlook.

Technical analysis suggested that spot could fall to $1,698 an ounce during the day, said Reuters market analyst Wang Tao.   

Though Greece is widely expected to reach a deal with its international lenders on the bailout deal, its trouble is likely to go on, supporting safe-haven interest in gold in the longer term, analysts and traders have said.

Later in the day investors will focus on what the European Central Bank is willing to do to help Greece when it holds its monthly policy meeting, with interest rates expected to stay on hold ahead of a major funding operation later this month.

"Gold is likely to remain in a sideways mode for a while between $1,700 and $1,800, unless we see any big surprise that could indicate a clear direction," said Hou Xinqiang, an analyst at Jinrui Futures in the southern city of Shenzhen.

The gold-silver ratio dipped to around 51, its lowest level in more than three months.