Gold hit a nine-week high in early trading Thursday, as a much lower yuan and more panicked selling in the Chinese stock market pulled global indices lower. Frightened Chinese stockholders flooded the Shanghai Exchange with sell orders Thursday, forcing the market down 7% in less than a half hour. This triggered the stock market to close for the day.
Gold broke the $1100 mark shortly after 9pm Eastern Time, then eased to test the level again all night. Prices rose again at the New York open, hitting a high of $1,108.90. These solid gains for the second day in a row may prompt some profit-taking, and selling by investors forced to liquidate assets to meet margin calls on their stock bets. A close above $1100 gold to extend the rally has the chance to breaking the $1050-$1085 channel to the upside.
A spectacular meltdown in China as the Shanghai stock market experienced its shortest trading day in history added fuel to global equity and commodities markets. Spooked by a plummeting yuan, frantic sellers pushed stocks down by 5% in just 13 minutes. This tripped the market "circuit breaker" implemented last week, causing a 15 minute halt in trading. Once again, instead of calming nerves, it bred widespread panic among stock owners. When the 15 minute halt was lifted, it took less than one minute for a flood sell orders to push the index down to a 7% loss, forcing an end to trading for the second time this week. The 29 minute session only saw 14 minutes of trading. For the first four trading days of 2016, Chinese stocks have lost 11.7%.
An emergency meeting of China's stock regulatory agency came to the same conclusion as the market at large -- the "circuit breaker" was increasing panic instead of calming markets. Therefore the rule will be suspended, effective Friday. Will investors feel less at risk, knowing they won't be locked out of selling a losing position, or will they take the chance to flee the market completely?
The Chinese government set the morning trading band for the yuan 0.5% lower for the second day, sparking fears of an increasing devaluation of the currency. This caused the currency to drop to its lowest point in nearly five years and revived concerns of China starting a currency war.
The "China Contagion" spread to Europe, where the fall in the British FTSE 100 index dropped below last summer's "Black Monday." European stocks were down more than 3% before recovering slightly after China announced the removal of its stock circuit breaker.
US stocks opened sharply lower to expand heavy losses, but eased upwards to "only" around 1% in the red. Yesterday saw both the Dow and S&P 500 close at lows last seen in October.
Dropping Dollar = Gains for Gold
The yen continued to be the top-performing currency to begin 2016, while the euro surged on good economic news out of the EU. The jump in the euro saw the dollar fall quickly around 5am Eastern Time. The dollar is seeing downward pressure after yesterday's release of the minutes from last month's FOMC meeting, which cast doubts on further interest rate hikes. The falling dollar is responsible for about 1/3 of gold's gains today.
The Importance of $1100 Gold
The $1100 mark is an important psychological threshold for gold. A close comfortably above this mark, around $1103 or $1104, puts $1125 in the crosshairs as the next important resistance level. Gold is testing $1100 from the upside this morning, working at transforming former resistance into support. This four-day rally has seen gold gaining steadily instead of in sudden jumps, which bodes well for a continued move upward. Hedge funds and speculators have been caught on the wrong side of the gold trade, with their short covering lending support to prices.
Wednesday saw COMEX gold close at a 7-week high of $1,091.90, a gain of $13.50. Spot gold closed at $1,093.80, up $16.30 (1.5%.) The session high was $1,096.40, and the session low was $1077.50.
First resistance is $1,104, followed by $1109, First support is yesterday's high of $1,096, then $1,089.
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