Gold Prices Gain on Rising Inflation

NEW YORK (TheStreet ) -- Gold and silver prices were getting a boost Thursday from a higher-than-expected inflation reading in the U.S.

Gold for April delivery was rising $6.70 to $1,381.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price broke through the $1,380 resistance level to hit a high of $1,383.80. The spot gold price was adding $5.40, according to Kitco's gold index.

Silver prices were up 29 cents to $30.92, hitting a high of $30.94, just shy of the $31 resistance area.

Leading today's minor rally was news that year over year inflation grew to 1.6% in the U.S. Excluding food and energy prices, the Consumer Price Index was still up 1% on the year. Although still below the Federal Reserve's 2% inflation target rate, the surge was enough to prompt traders to buy gold and silver as an inflation hedge.

A higher reading, however, might also bring back the debate of higher interest rates, the Fed's primary tool to fight inflation. Although Bernanke has promised low rates for "an extended period of time," the worry of a hike could temper prices.

Jon Nadler, senior analyst at Kitco.com, says it's entirely possible gold prices could hit $1,400, but not on inflation data alone "I think the spread of the societal unrest in the Middle East and North Africa might contribute more to gold bids."

Over the long term, however, Nadler says any interest rate hikes later in 2011 could "certainly pull the rug out from some of the bullish bids that gold has been receiving as an [inflation hedge]."

Expect gold prices to stay volatile Thursday and Friday. Not only is this weekend a long holiday in the U.S., which might cause traders to rotate into cash and book profits, but options expire on Friday. Options expiration happens once a month where traders must decide to either let their contracts expire and become worthless or roll them over to future months. In other words, traders do a lot of work during options expiration that tends to lead to more volatility in the market.

In the past three months, gold has sold off the week leading up to options expiration and then, two times out of three, rallied the Monday after.

In November, spot gold sunk $26 then popped $16 on Monday. In December, prices fell $31 then rose $12 on Monday and in January gold fell $17 then stayed flat on Monday, but the gold market was also dealing with beginning of the year rebalancing.