Spot gold opened steady this morning at $1,095/oz as yesterday’s spillover from the plunge in Chinese equities looks to be contained today; although Shanghai lost another 1.7% overnight, stock indices in Europe and the U.S. pointed higher this morning. The precious metals also looked to bounce back: silver was 0.4% higher at $14.70/oz, and palladium (which has had an odd affinity with silver over the last month or so) gained $4 (0.65%) to $620/oz. Platinum, which has tracked lower with gold recently, was $4 lower at $982/oz.
Yesterday in the Markets
The metals opened slightly in the red yesterday before moving closer to unchanged by the closing bell. Stock indices in the U.S. traded nearly 1% lower throughout the day, while 10-year Treasuries saw demand, dropping yields as low as 2.21% before easing back on Tuesday.
Factors Affecting Gold Today
We may see some higher volumes in precious metal trading today, as today is the monthly gold options expiry. The news media is still relentlessly attacking gold, revealing how badly some of the pundits need a refresher in how gold functions; all of the ways in which gold is a unique asset are actually what make it an attractive hedge and a store of value, but the talking heads in finance can insist all they want that it has no yield aside from price appreciation, which is true. But people who are holding gold for more than speculative purposes didn’t buy the metal because they needed a quarterly dividend. Watch as somesuch pundit from Bloomberg questions if there any reasons left to own gold [VIDEO].
As stocks look to gain today, it’s encouraging that the precious metals opened this morning steady, because most of the reliable indicators for where gold is headed—like the strength of the dollar and commodities prices—are still pointing toward continued weakness: the dollar rose 0.4% on the DXY index this morning to 96.9, while crude prices remain low, with WTI slightly higher at $47.43/bbl and Brent crude nearly 1% off, just below $53/bbl. While it’s true that a sharp rally is unlikely for the metals in the near-term, it should also be noted that when the news media is touting the death of gold, or gold investors’ ultimate capitulation, then you can be almost certain that the bottom is in, if only for the wave of value buying and contrarian sentiment such a declaration generates.
The spillover from China may be contained, but that doesn’t mean the global outlook ought to be risk-off regarding Shanghai’s woes. Worsening losses on the stock exchanges will no doubt dry up investment in other parts of the Chinese economy as it unavoidably enters a period of maturation and slow down. Anyone who believes that 7+ percent growth (more than double what a developed economy usually experiences in boom time) is sustainable for another 25 years is kidding themselves.
The downward spiral seems to be coming even amid aggressive support from the Communist regime and, anecdotally, abiding belief from retail investors on the mainland who are convinced that the government will always step in to make their investments whole eventually. This is a dangerous delusion, especially amid the precipitous decline of those investments. For some perspective on how far the Chinese markets may fall, even with the more than $4 trillion sell-off of Chinese equities over the last 6 weeks, the Shanghai Composite is still up nearly 15% year-to-date. Clearly, there’s more room to slide further on the downside.
Meantime, the focus on political news of increasingly trivial consequence will ramp up as we get further into campaign season in the U.S. As the presidential debates (which promise to be either a spectacular fiasco or hardly worth talking about) approach, the various candidates from Donald Trump to Mike Huckabee to Hillary Clinton will continue to garner the media’s attention for making even the most mundane statements.
Everyone will be waiting for the FOMC announcement tomorrow afternoon at 2 pm EST, though Janet Yellen will not hold a press conference with the media after the committee’s monthly statement is released.