Those who began to completely disown gold for the past four weeks have now once again been captured by imagination. Gold typically acts as a safe haven – or a hedge – for investors during volatile periods or uncertainty in global markets and it so appears that the precious metal is not quite so useless after all when things get turbulent on the markets.
On July 24, spot gold touched $1,077.50 per ounce, the lowest price since April 2010. Prices remained at that level for a short period before climbing over the past few weeks.
But the tables have turned. Gold prices are preparing to close its second consecutive week in positive territory, showing gains of more than 5% after the market hit a six-week high in overnight activity Friday.
Gold prices surged during Thursday’s US trading session as the multi-year lows seen a month ago have evaporated as short covering boosted the entire precious metal’s complex.
The spot gold price was seen at $1,150.5/1,150.9- around its highest in more than a month.
Trade has ranged from $1,150.3 to $1,168.4 – it’s highest since July 7 – so far.
The past two sessions have seen the yellow-metal jump to the highest price in over a month upon the release of the Federal Open Market Committee (FOMC) July meeting minutes.
Investors read the statement – especially the concern over the slowdown in the Chinese economy – as a dovish tone heading into the oft-discussed September FOMC meeting. Apart from this there were some other factors that contributed to this rally-
Equities- Equities were in retreat once again as Chinese data added to concerns about global economic growth.
Investors looking to rotate out of strong markets are now looking for oversold asset classes, such as gold, to park their profits while corrections are underway. This demand for gold helped push its prices higher as investors shifted focus from equities to the yellow metal.
China- Gold is finally attracting safe-haven demand as concerns over the fallout from China’s devaluation spreads and the market is waking up to the likelihood that emerging market economies are entering another tough time and that could spread to mature economies.
In China, flash manufacturing PMI undershot expectations at 47.1 – below the 50 contraction level. It was the lowest reading since March 2009 and follows the previous poor reading of 48.2.
China’s economic problems are only worsening as recent data showed that China’s manufacturing sector fell to its weakest point in six-and-a-half years.
Many analysts and economists are expecting that continued financial turmoil in China could delay the Federal Reserve from hiking rates as early as September, which would be U.S. dollar negative and gold positive.
U.S. economic data- In a heavy US data day, weekly unemployment claims were at 277,000, near the forecast of 272,000 and holding below the psychological 300,000 mark.
Meanwhile existing home sales in July were at 5.59 million, above the forecast of 5.45 million. The Philly Fed Manufacturing Index in August was at 8.3, besting the 6.9 prediction.
In Wednesday’s US data, CPI in July was up 0.1 percent over the previous month, below the 0.2 percent forecast.
Core CPI – excluding food and energy – was also up 0.1 percent month-over-month in July, again missing the consensus of 0.2 percent.
Over the last few months, various members of the organization have become increasingly hawkish with Federal Reserve chairwoman Janet Yellen expressing a desire to raise rates sometime this year (September), but once again a weak economic report has delayed investor’s expectations.
Fed Interest Rate Hike- The July 28-29 FOMC meeting minutes released overnight suggested that the Fed may resist raising rates in September.
However, inflation continues to fall below the Federal Reserve’s target of two percent which has afftcted the delay if a hike which was probable to happen in September.
The minutes of the US Fed’s July meeting showed a committee relatively content with domestic economic activity and labor market progress. The advance in gold prices was largely driven by the dovish Federal Reserve July meeting minutes and as traders scaled back their views on a US interest rate rise in September.
According to the Fed Fund Future, a rate hike in September has been virtually priced out, and a rate hike by year’s end is regarded as only 75 percent probable.
Federal Reserve Chairwoman Janet Yellen has expressed a desire to raise interest rates this calendar year after rates have been at near zero levels since December 2008 which once again set gold prices moving high.
ETF- Meanwhile, inflows in gold ETF holdings accelerated – holdings in funds tracked by Fast Markets have increased to 1,526.70 tonnes.
Greece- In news, rancorous disputes in Greece over an additional bailout and further austerity measures has forced Greek Prime Minister Alexis Tsipras to resign as he called for a snap election next month.
So basically, its lot of uncertainty and turbulence in the world economies that has ignited up the rocket of gold prices and the same is expected to happen in the week to come.
Gold could continue to benefit next week as China’s financial crisis could have more weight on the Federal Reserve’s monetary policy decisions more than domestic economic data, according to some analysts.
Looking ahead, because of gold’s strong gains, optimism is high in the marketplace that this rally will continue in the near-term.
Continued weakness in equity markets, weakness in China and political uncertainty in Greece: all of these have the potential to boost gold higher next week which has recreated bullish sentiments in the market.
Although some economists are expecting U.S. economic data to take a back seat to global financial problems, some of the data that could attract some attention includes July’s durable goods report, housing sales data, and the preliminary reading of U.S. second quarter gross domestic product (GDP) all due for release in the week ahead.
Till then we wait for a new catalyst to push prices higher in the near term.