Economic growth concerns and the US Federal Reserve’s decision not to raise interest rates boosted the gold price this week.
After a tough month, the gold price has finally started to make a comeback. It hit a near three-and-a-half-week high on Wednesday on concerns about the health of the Chinese economy following its devaluation of the yuan.
The early release of minutes from the US Federal Reserve’s July policy meeting also boosted interest in the yellow metal. Investors have been concerned throughout 2015 about an anticipated interest rate hike from the Fed. However, while the minutes show that the central bank is happy with improvements to the US labor market — employment is down and job openings are up — the pace of inflation led it to decide against a rate hike at this time.
At 2:30 p.m. EST on Wednesday, the spot gold price was up 1 percent, at $1,128.86 an ounce, having touched a one-month high of $1,129.01. Meanwhile, gold for December delivery settled up $11, at $1,127.90.
Global economic concerns
The minutes also include the Fed’s thoughts on the foreign economic outlook — namely financial problems in Greece and declines in the Chinese stock market.
“While the recent Chinese stock market decline seemed to have had limited implications to date for the growth outlook in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook,” the minutes read. “Some participants also discussed the risk that a possible divergence in interest rates in the United States and abroad might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports.”
What’s more, emerging markets took another loss as Vietnam and Kazakhstan both devalued their currencies in response to China’s decision, adding to concerns about the overall global growth.
Naturally, this laundry list of economic concerns means investors are looking for a safe haven — and longer term that could bode well for gold.
“Growing fears of destabilization in the world economy have sparked another round of capital outflows from stock markets not only in Asia Pacific markets but also in Europe and even the U.S., exacerbating seasonal uncertainty,” Colin Cieszynski, chief market strategist at CMC Markets, told MarketWatch. “Because of this, some capital appears to be finding its way back into defensive havens, particularly gold.”
Gold price moving forward
While some banks remain bearish on gold, with Citibank lowering its average gold price outlook for 2015 and 2016 and UBS (NYSE:UBS) dropping its one-month gold price forecast, HSBC recently put out a report that lists all the reasons it expects a year-end recovery.
CNBC put together an outline of the report, noting that HSBC sees the gold price recovering to $1,200 and reaching up to $1,225 toward the end of 2015. According to the bank, the Fed’s much-anticipated rate decision has already been priced into the gold price, meaning the metal’s reaction to the hike likely won’t be as negative as most fear. What’s more, HSBC notes that historically Fed rate increases have had a tendency to weaken the US dollar, which usually means good things for gold.
The bank also points out that short positions in gold have historically been higher compared to long positions, which are high, but not exceptional by historical standards. “This leaves the market open to a sharp short covering rally if investment sentiment reverse,” the bank said.
Looking at global influences, HSBC said that while emerging market consumers have failed to increase purchases amid the gold price drop, the metal’s lower price will eventually lead to greater demand.
“In important gold consuming nations, such as China, India, Indonesia, and Vietnam, as well as other EMs, consumers may have fewer tools at their disposal with which to protect savings and household wealth against rising prices or low or negative real interest rates,” the firm’s report states.
Finally, the bank notes that the People’s Bank of China’s gold reserves, which are up 57 percent since 2009, are bullish for the market in the longer-term. According to HSBC, the bank has a lot of influence, so its decision to increase its gold reserves “may lead other EM central banks to examine purchasing bullion.”
Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.
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