Declining Dollar, Yields Giving Gold Some Upside
The gold market is higher Wednesday as losses in the dollar and falling yields boost demand. Despite the declines in the dollar and yields today, crude oil did see a large drop that took prices to an eight-month low, limiting gold’s upside in the process. The bulls have put some distance between the market and the $1700 level, however, and could look to continue today’s ascent back towards the $1750 area.
Stocks are higher at midday Wednesday but risk aversion overall remains elevated. The recent economic news from China has not been great, and its troubles could become increasingly widespread. China reported today that its imports and exports declined more in August than markets were expecting. This decline is not really surprising, however, as the nation has continued to deal with massive Covid lockdowns and a weaker yuan. Efforts to shore up the Chinese economy have thus far appeared inadequate and more policy directives could be forthcoming in the months ahead.
China is the globe’s second-largest economy. As long as it continues to struggle economically, the world is likely to do the same. Troubles in China and its economy will fuel risk aversion across the globe and could lead investors out of risk assets and into perceived safe havens such as gold. A slowing Chinese economy may also have a bearish impact on gold, however, as its demand could deflate substantially.
Investors will keep a close eye on China as they await the next Fed policy meeting later this month. The Fed is expected to hike rates aggressively once again, with near even odds of a 50 or 75-point hike being seen. Other central banks are also taking rates higher in an effort to calm inflation at 40-year highs. Today, the Central Bank of Canada raised its key interest rate by 75-basis points. On Thursday, the European Central Bank is expected to do the same.
The gold bears remain in firm control of the market despite today’s upside. The four-week old downtrend on the daily chart remains intact and the bears will continue to try to produce a close below the $1700 level and then the July lows around $1686. The bulls need the market to close first above the $1750 level. A close then above the $1800 level would put the market onto more neutral territory from which the bulls could potentially put a rally together.
The long-term narrative for gold remains highly bullish. The recent trading range gold has found itself in may prove to be nothing more than a great long-term buying opportunity. Any further dips in gold below the $1700 level could be aggressively bought by long-term investors and the metal may not fall much further if the selling is absorbed.
Until more is known about the Fed’s plans for interest rates and quantitative tightening, the market may remain mostly sideways for some time. Gold could bide its time until the Fed decides to start loosening policy again, at which time it could quickly take off towards all-time highs.