Spot gold rose above the $1,120 mark this morning, as the Empire State Manufacturing Index posted a huge loss—down 17 points to a reading of -14.9, when a climb to +5.0 was expected. This is the lowest reading for the index since April 2009, the height of the financial crisis. Bonds followed gold into positive territory, with the yield on the 10-year Treasury down to 2.15%. Spot gold posted its best weekly gain in two months on Friday, breaking upwards out of a bear pennant pattern on the daily charts. Traders are watching to see if this breakout has any legs. One large factor will be the strength of the U.S. dollar, which will hinge on expectations of an interest rate hike by the Fed next month.
Seeking Safe Harbor
Gold is seeing safe haven demand as the echoes of the surprise devaluation of the Chinese yuan (renminbi) still reverberate through the markets. Emerging market currencies are melting down in the worst performance since the 1998 Asian Financial Crisis. Everyday citizens and institutions both are buying gold before their currency depreciates further. Chinese citizens, leery of the stock market after its recent crash and uncertain how much further their money will devalue, are also buying gold.
Buyers in India are on a buying spree before the fall festival season, eschewing bars and coins for gold jewelry. One major jeweler was quoted as saying “We are experiencing phenomenal sales throughout the country.” Globally renowned Swiss refiner PAMP Suisse even mints Lakshmi silver and gold bars, a perfect gift for Diwali.
Outside of Asia, a reported 500,000 people hit the streets in Brazil in protests calling for the resignation or impeachment of President Dilma Rousseff. She and senior officials in her party have been implicated in a corruption scandal at state-owned oil company Petrobras, where Rousseff was CEO before becoming president. In Ukraine, fighting has intensified between government forces and Russian-backed rebels in the eastern half of the country. In Greece, a rebellion is brewing in the ruling party over a bailout plan that goes against everything they campaigned on. A vote of confidence is expected to be called by Prime Minister Tsipras, with snap elections likely.
In Europe, Degussa reported that gold sales in Germany increased by 50% in the first six months of the year. Degussa CEO Wolfgang Wrzesniok-Rossbach said "We are seeing constant buying. Greece has certainly been a driver, as well as the weak euro."
China—Gold's Best Friend?
China may be gold's best friend, as the summer gives way to the autumn buying season. Not only has a surprise devaluation of the yuan jolted markets, but the government in Beijing released updated numbers on its official gold holdings for the second month in a row. Prior to June, those numbers had not been updated since 2009. Official Chinese gold reserves grew by 19 metric tonnes in July, to 1,677 mt. This makes China's gold reserves #5 in the world, and the largest non-Western gold reserve. Only the United States, Germany, the International Monetary Fund, and Italy have larger gold reserves.
This sudden transparency (despite many analysts suspecting that Beijing is hiding the bulk of its gold in non-central bank accounts) is due to the Chinese government wanting the IMF to include the yuan in its Special Drawing Rights (SDR) basket of currencies, which is kind of an international reserve currency. The sudden devaluation in the yuan, to bring it closer to market value, is also part of Beijing's campaign to achieve the coveted SDR status.
The Chinese and Indians aren't the only ones bullish on gold: Billionaire hedge fund legend Stan Druckenmiller has placed a huge bet on gold prices rising. Some gold mining companies also feel the worst is behind them, as Red Eagle Mining (TSX: RD) starts drilling the first gold mine in Columbia in 20 years, and Newcrest (ASX: NCM), Australia's biggest independent gold producer, decides to keep and expand one of its best gold mines instead of selling it after returning to a profit. Mega-miner GoldCorp (NYSE: GG) just started production at a new $2 billion gold mine in Canada.