Exuberant Bounce-back Day Pushes Gold Lower

August 25th, 2015 by

Source: Bloomberg

Source: Bloomberg

Positive economic data, mixed with the already-baked-in rebound for global markets on Tuesday, are buoying investors’ risk appetite and consequently driving gold prices lower. After trading between $1,150/oz and $1,160/oz since last week’s rally, spot gold plunged as much as $18 this morning, sinking down to about $1,136.50/oz. Coming into Tuesday, the gold price had rallied 4.5% over the previous month.

“Turnaround Tuesday”

After global equities got slaughtered on Monday, all signs pointed toward a recovery for the markets (outside of China, that is). Sure enough, European shares opened sharply higher, looking to wipe out the previous day’s considerable losses, while U.S. indices each jumped more than 2% at the opening bell.

The encouraging news kept coming throughout the morning, fueling the rebound ever further. The People’s Bank of China responded to its stock market woes by cutting interest rates by a quarter of a percent (25 basis points) and also lowering the reserve ratio requirements for Chinese banks by half a percentage point. The ongoing slump for commodities was halted, at least for the moment, though WTI crude is still stuck below $40 per barrel.

Positive Economic Data

The release of fresh data about the U.S. economy on Tuesday morning placed the greatest pressure on spot gold, however.


First, new home sales rose by 5.4% in July, providing a somewhat rosier outlook of the real estate market. The July sales numbers for new homes were up 26% year-over-year. Moreover, according to the National Association of Realtors, sales of existing homes accelerated 2% in July, the fastest pace of existing home sales since February 2007. Price appreciation remained subdued, however, as the median home price was up just 1.45% in July and the S&P Case-Shiller home price index actually fell by 0.1% during June.

The consumer confidence gauge also offered a generally stronger view of the economy from the perspective of the consumer. The measure rose to 101.5 in August, far exceeding expectations to the point of plumb surprising forecasters. The main component of the stronger reading was a significant drop in the number of respondents who felt that jobs were “currently hard to get,” which fell from to 28.4% to just 21.9%. Respondents also cited more favorable labor market conditions overall for their upbeat outlook on the economy.

In addition, the flash services PMI reading also beat analysts’ expectations after coming in at 55.2. (A metric over 50.0 indicates growth, while anything lower represents contraction.) The numbers revealed better-than-expected expansion for the private services sector thanks to steady hiring, although new orders were weak and prices remained flat—the worst reading for price levels in more than 2 years.

Volatility Going Forward

Source: pgm-blog.com

Source: pgm-blog.com

The good feelings in the U.S. markets right now may swing back just as quickly as yesterday’s plunge reversed direction; in other words, don’t be surprised by continued volatility in the financial markets in the coming weeks. The VIX index measuring market volatility touched a 6-and-1/2-year high on Tuesday. This potential for large swings in trading is helping curb the downside for gold, even amid today’s price drop, as investors can’t entirely ignore safe havens with price action this jittery.