Gold hit fresh five-week highs this morning after recording the largest single-day gains in a week yesterday, following reports that first-time jobless claims climbed by 4,000 applications to 277,000. This is the fourth week of increases in job losses. Spot gold hit the psychologically important $1,150 level in late morning trading. $1,159 is the 61.8% Fibonacci retracement level from gold’s all-time high in 2011, and may be in play if gold manages to hold on to today’s gains.
The Shanghai Composite stock index in China fell by over 3% today despite $20 billion being thrown at the market by Chinese authorities. State-owned banks have been staging major interventions in the currency markets by buying yuan with dollars in an attempt to stem its fall. The weakness in the yuan is fanning fears of capital flight from China at a time when the economy seems to be faltering and bringing emerging market economies down with it.
China pulled down stocks across the world, and has led to safe-haven demand in gold, the Swiss franc, Treasuries, and German bunds. The yield on the 10-year T-note is below 2.10% while the yield on the 1-year German bund is below 0.60%.
IMF Delays SDR Decision
Today’s decision by the International Monetary Fund to push back rebalancing the Special Drawing Rights basket of reserve currencies for another year was seen by the markets as an indictment on Beijing’s inability to allow the yuan to freely trade without crashing its economy. The SDR is rebalanced every five years, with this year being the latest adjustment. However, the IMF has decided to push this back by a year to give China more time to qualify for inclusion. Inclusion among the strongest reserve currencies would be a source of prestige for China, and being locked out for five more years would be a great loss of face.
News of the delay was still seen as a vote of “no confidence” in the Chinese economy by the IMF, leading to the sell-off. The Hang Seng index in Hong Kong fell into a bear market with today’s losses, while the S&P 500 dropped over 1% in morning trading to erase all gains for the year.
The devaluation of the yuan last week has led to a meltdown in emerging market currencies, and a resurgence in the euro. The European common currency has spiked to over 1.12 against the dollar, which has lost its momentum after markets decided the Fed was unlikely to hike interest rates next month. The euro got a boost today when the EU approved the first tranche of the new bailout plan for Greece, allowing the beleaguered nation to make a €3.2-billion debt payment to the European Central Bank that was due today.
Another Bank Says Gold is a Bargain
Bank of America Merrill Lynch’s lasted fund latest fund manager survey stated that gold is being undervalued by 1%. The same report cited bonds as being overvalued. BoAML joins Commerzbank and others in indicating that the bottom is either in, or near, for gold.
Retail investors in Europe were snapping up gold in the second quarter of the year. 47 metric tonnes of gold were purchased by individual investors, according to the World Gold Council. Fully half of that total was purchased by investors in Germany, where demand rose by 24%.
Producer price data for the U.S. and across Europe will be released tomorrow, which may guide the Euro/Dollar trade and affect gold prices.