China's Christmas Day interest rate hike had only a minimal immediate impact on gold futures on the Comex division of the New York Mercantile Exchange as the morning's losses were easily recouped due to a weaker dollar and strong physical demand.

Comex gold for February delivery was recently up $1.90 at $1,382.40 an ounce in New York.

Clearly, the big news over the weekend was that Chinese authorities on Christmas day raised interest rates by 25 basis points. The one-year benchmark lending rate increased from 5.56 to 5.81 and the benchmark deposit rate rose from 2.25 to 2.75 percent.

As would be expected, gold immediately dropped to $1372.70, down 0.7 percent, as electronic trade on the Comex reopened following the Christmas holiday; however, the impact was muted as the rate increase was expected and as volumes were thin following the holiday weekend.

"The market assumed that a rate hike was going to happen so most of its impact has already been priced in. Also, the Chinese were smart to announce this on Christmas day as it minimized market volatility and keep an unwarranted knee-jerk from happening," a US-based gold trader said.

The trader, who himself was stuck at Boston's Logan International Airport due to a flight delay, said that the massive blizzard that hit the east coast of the US overnight will keep some traders out of the office on Monday, which will also lead to decreased volumes on what is traditionally already a slow trading day.

Due to the weather conditions, the open outcry trading on the Nymex and Comex trading floors has been delayed until 11:00 am EST. Trading on CME Globex and ClearPort was unaffected.

Dennis Gartman, the author of the Gartman Letter, said in a note that Chinese rate increase was somewhat of a surprise as he surmised that the authorities had done enough in recent weeks in raising reserve requirements.

"However, the vast majority of the market watchers around the world had been expecting a rate increase by the Chinese for some while and many had been expecting an increase of 50 basis points. Thus, in reality, the effects are likely to be somewhat bearish on capital and commodity markets generally, but we suspect that the effects will be modest, not material," Gartman said.

In fact, the impact of the news out of China was short lived as gold quickly pared its losses as the dollar weakened and investors, mostly out of Asia, engaged in dip-buying.

The euro rose to 1.3151 against the dollar Monday morning from 1.3117 as concerns over eurozone sovereign-debt lessened to a small degree after China said that it may purchase 4-5 billion euros of Portugal's debt.

"People had been talking about China tightening its monetary policy for weeks but now that it has happened investors have shrugged off the news. This highlights the bullish momentum that's still in place. I would expect for gold to quickly moved past $1,400 once everyone is back at work next week," the trader said.

Silver for March delivery on the Comex was recently down 9.3 cents at $29.235 an ounce.


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