Gold jumped up to a 6-week high near $1,170/oz overnight in China on poor factory data before easing back to $1,155/oz by this morning's open. It appears we may again be seeing safe haven demand for gold as the bad news about China, global currencies, and especially global equities are helping drive the metal to its best two-week performance of the year. Although the yellow metal is still down over 2% year-to-date, the current rally appears to be in direct response to shifting fundamentals and a sharp reversal in market sentiment, especially regarding the Chinese economy; the outlook for global stocks; and how these developments influence the Federal Reserve's decision about the timing of its first rate hike.
Fed Fears Overblown?
How quickly things change: just a few weeks ago, it seemed a virtual certainty that the Federal Reserve would be raising interest rates at its September policy meeting. A vast majority of market analysts—in some cases, 70% to 80% of respondents—pegged September as the most likely time for the Fed to raise rates for the first time since before the financial crisis. Even after China's stock market cratered, and the mess in Europe became somewhat stickier, most observers felt confident that the U.S. economy would be insulated from these external factors.
The stock market rout in mainland China not only spread, but prompted a devaluation of the yuan by the People's Bank of China that, in turn, sent shock waves through both developed markets and the other emerging markets around the world. Pile on the fact that the deflationary environment in the commodities sector persists, as crude oil and other resources continue to drop in price, and now the consensus outlook is that the Fed's plans on moving rates will be pushed back to 2016. Forget September; even a December rate hike is increasingly in doubt.
Wednesday's dovish meeting minutes from the FOMC this week only drove this reversal in expectations into hyper-drive. Gold has been the clear beneficiary of this uncertainty, finding renewed safe have appeal among investors who are fleeing from equities and other commodities.
Even when the Fed does raise rates, the accompanying firming for the dollar doesn't necessarily mean that gold will suffer, as many sources typically report. A brief look at how gold reacted the last two times the Federal Reserve increased the federal funds rate places some reasonable doubt about the logic that a stronger dollar, and even the increased leasing costs for gold, that results from a rate hike will be bad for gold prices.
A pair of key indicators in technical analyses of the gold price chart point toward the potential fortunes for the precious metal. The gold price has now broken above its 50-day moving average, a solid indicator that the price is definitively in an uptrend; how long that indicator remains in place is what everyone will be watching. In addition, gold is finally approaching its 61.8% Fibonacci retracement level, which occurs at $1,174.20 per ounce. Right now, this is a strong resistance level for gold, particularly in light of last night's price jump petering out just below this key level. However, if spot gold manages to move above the 61.8% Fibonacci retracement in trading on Friday or during next week, that level would represent support for gold rather than resistance.