LAWRIE WILLIAMS: Gold price plunges in China’s market absence

‘When the cat’s away the mice will play’ the age-old saying goes, and so it is with the gold markets – particularly the COMEX gold futures market.  This week the Chinese cat is on holiday.  There’s no Shanghai Gold Benchmark to demonstrate positivity or negativity in Asian markets and the bullion bank mice, or should it be rats, have taken the opportunity to once again drive the gold price down – pretty successfully as it happens.  It has been knocked through some key stop loss levels and will probably now find some stability in the high $1200s, before, we suspect, making some kind of a recovery when Chinese markets re-open next week.

Ironically the week long Chinese holiday is the second ‘Golden Week’ holiday of the year.  The Chinese are good at buying gold on the dips so should they choose this opportunity to do so again, and gold subsequently recovers, then it certainly could be a Golden Week for thwe Chinese gold buyer!

Meanwhile other forces seen as being negative for gold have come into play which have perhaps exacerbated the fall.  The dollar index has strengthened, largely on the back of a slip in the pound sterling to a 30-year low against the US dollar as fears of a hard Brexit are hitting the markets – although interestingly not the UK stock market which is continuing to rise.  (UK exports are being boosted by the weak pound and this will continue until the effects of higher imported material import prices filter through)

Simultaneously some US Fed insiders are again pressing for interest rate rises sooner rather than later and the idea of such a move always seems to put pressure on the gold price, albeit the combination of any likely very small interest rate increase, when coupled with a rising inflation target (another Fed aim) will still leave interest rates effectively in negative territory which all-along has been seen as gold-positive.  From the gold market’s point of view perhaps the sooner the Fed does actually restart raising interest rates the better as that will remove one element of uncertainty for the markets.

And, consider what happened last time the Fed raised interest rates – 10 months ago.  That almost coincided with the start of gold’s most prominent bull run since 2011!

There are still those predicting gold will soar back up to $1400 – or even far higher – this calendar year, although if they are going to be correct the price will have to start moving soon.  October has recently been a fairly weak month for the gold price – perhaps in part because of the Chinese Golden Week holiday – but it can see a pick up in November and December, particularly in terms of Asian demand with the Dhanteras/Diwali Festival in India – and for Indians globally – coming right at the end of this month and in the runup to the Chinese New Year which next year is on January 28th.

So there could well be better times ahead for the gold price before the end of 2016 and where gold goes, silver will likely follow, but with more volatility.  Gold investors should not be too despondent yet.

04 Oct 2016

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com