Gold has fallen below $1,900 per ounce this week on market fears over a deteriorating Chinese economy and higher US rates.
Gold briefly dropped below $1,900 in June, but the last time gold consistently traded at this level was in early March before the banking crisis sparked the latest rally. Gold bulls will now be hoping for a quick rebound in gold, while investors will be weighing up whether this is the dip to buy based on the economic outlook ahead.
China’s economy continues to look weak after recently entering a period of deflation, in stark contrast to many Western economies. China’s central bank surprised markets this week with a rate cut to it’s one-year medium-term loans. They hope the cut will help spark some new life into China’s ailing economy, but Asian markets continue to struggle as investors look for more action from the government.
The property sector in China remains a key focus with asset managers Zhongzhi Enterprise Group planning a debt restructuring due to liquidity issues. This announcement came hot on the heels of financial services company Zhongrong International Trust missing key debt repayments. A debt crisis with falling economic output is making investors in China very wary, dropping stock markets like the Hang Send Index down 9% YTD.
China is a key market for both gold (jewellery) and silver (electronics), so the current slowdown is considered negative for both metals. If the deterioration worsens however and begins to impact the global economy in a more widespread way, then this would likely revert and send people towards the safe haven of gold.
The notes from last month’s Fed rate meeting also suggested that there may still be further hikes to come for the US. The FOMC noted that inflation is still above target and that there are significant upside risks to inflation. As such, further hikes or a prolonged period of high rates may be needed to bring inflation down. The US economy has so far proven resilient to higher rates, but markets are still keen to see borrowing costs brought down.
The US Dollar Index is up more than 3% in the past month, and expectations of higher rates will only help support the currency. US bond yields have also been rising on the news, with 10-year bond yields reaching their highest since 2008. The combination of a stronger dollar and higher bond yields is putting further pressure on gold, causing it to dip to $1,895 per ounce at the time of writing.
There is plenty on the horizon to suggest a higher gold price, but in the short-term, higher rates mean investors are looking for other places to put their money.
