Gold rises on China inflation, commodity rallies

An employee picks up a gold bar at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011.

NEW YORK (Reuters) - Gold rose in quiet trade on Monday after the previous session's sharp drop, lifted by higher commodity prices and benign inflation data from China.

Fears of rising commodity prices because of a record high in U.S. soybean futures and corn's rally amid severe dry conditions in the U.S. Midwest boosted the metal's inflation-hedge appeal. Surging crude oil prices and a weaker dollar also boosted gold.

Also underpinning bullion was Chinese data showing the inflation rate undershot expectations in June, signaling more room by China's central bank to ease monetary policy to stave off a slowdown.

Traders said option trading suggested the gold price could rebound after its recent weakness due to deflation fears amid a string of disappointing economic data. The metal has lost 2 percent in the previous two sessions.

"There is option activity here and volatility is being bought over. There is a big put buyer buying futures and August $1,550 puts, and that usually pertains a move up," said Jonathan Jossen, COMEX gold options floor trader.

Spot gold climbed 0.5 percent at $1,590.50 an ounce by 2:23 p.m. EDT (1823 GMT).

U.S. COMEX gold futures for August delivery settled up $10.20 at $1,589.10, with volume at about 40 percent below its 30-day average, preliminary Reuters data showed.

Silver rose 1.3 percent to $27.41 an ounce.

Gold dropped 1.5 percent on Friday after weak U.S. jobs data failed to raise hopes that the Federal Reserve will embark on a third round of asset-buying program.

San Francisco Federal Reserve Bank President John Williams said on Monday the U.S. central bank is prepared to do more to bring down unemployment that is far too high and to steer inflation back up to the Fed's 2 percent target.

Economists polled by Reuters now attach a 70 percent chance to the Fed's embarking on another round of government-bonds buying to lower borrowing costs. That estimate has increased from around 50 percent in late June.

CHINA'S INFLATION TAME

China's annual consumer inflation eased more than expected to 2.2 percent in June from 3.0 percent in May, creating more room for the central bank to ease policy to bolster economic growth.

Daniel Smith, an analyst with Standard Chartered, said that possible rate cuts in China will increase risk appetite. Contrary to the belief that gold is a safe haven, bullion tends to rise with other assets when liquidity improves on central-bank actions, he said.

Among platinum group metals, platinum inched up 0.1 percent to $1,439.23 an ounce, while palladium rose by 1.1 percent to $579.08 an ounce.

(Additional reporting by Harpreet Bhal and Amanda Cooper in London; editing by Sofina Mirza-Reid and Marguerita Choy)