Risk Aversion Monday
The markets are off to a rough start in early action Monday as stocks sink. Investors are becoming increasingly concerned about a Chinese property developer and its financial condition. The company, Evergrande, is in substantial trouble and markets are worried about the risk of contagion. China may now be facing its own form of a Lehman Brothers moment, and how it handles the situation could determine how financial markets react for months ahead.
Stocks are at four week lows in early trading, with the Dow Jones Industrial Average down about 500 points. Fear is hitting stocks and risk assets like a tidal wave today, and market volatility could potentially see a rise that could last not only for days but for weeks or months.
Much of the capital outflows from equities today are finding their way into the gold market. Gold is up over $11 per ounce in early action and could see further gains ahead if the stock sell-off does not ease. Investors may also be content with going to cash or even Bitcoin and cryptos if the selling doesn’t ease up. Whatever the case may prove to be, there may be a significant amount of capital looking for a new home by the end of the day and that may be bullish for gold.
The Evergrande crisis comes at a time when the Federal Reserve is set to meet Tuesday and Wednesday of this week. The Fed will then announce its decision on policy and provide a press conference for Chairman Jerome Powell. The question investors may now be asking, however, is whether a major sell-off early this week could dictate the Fed’s discussion on its tapering plans. The central bank’s tapering plans have been the subject of ongoing debate and anything that could keep the Fed’s foot on the gas pedal longer may be viewed as being bullish for gold.
The Dollar Index is higher today, hitting a four-week high in early action. Gold is climbing despite the stronger dollar, however, and any strength in the currency may simply be a function of risk aversion. Ongoing dollar weakness, however, could pave the way for higher gold prices as they often exhibit a negative correlation.
Despite today’s strength and price rise, the gold bulls still have their work cut out for them. The market remains firmly below previous resistance at the $1800 level and will likely not get people too excited without a breakout above this area on a closing basis. The bulls must then target resistance in the mid $1830s and take it out to attract further buying interest. If that proves to be the case, the bulls could then potentially ride a quick wave higher as gold prices could sail all the way towards the $1900 level. The bears, on the other hand, will look to take advantage of recent momentum and to drive prices further below previous support in the $1775 region. If gold declines further, the bears could pave the way for a rapid leg lower that could see prices move towards the $1650 region in short order.