Posted on August 03, 2015
Gold prices are under some pressure today as stocks and crude oil sink while the dollar index trades slightly higher.
China remains a center of focus for global markets as anxiety over the state of the world’s second largest economy increases. China recently released more disappointing economic data, and this will potentially continue to drive risk aversion in global markets.
While Beijing has taken numerous steps in order to support its stock market, some are now wondering if recent action taken will be enough. Should further volatility be seen in Chinese equities, the wave of selling has the potential to spill over into other markets. The Chinese news is hitting the commodity sector hard, as crude oil slides further today approaching the $45 per barrel mark.
As one of the biggest gold consumers on the planet, weakness in China may potentially weigh on gold and the precious metals complex. Thus far, worries about China have not ignited any large-scale safe haven buying interest in gold, and the path of least resistance remains lower.
That being said, additional weakness in Chinese stocks could potentially prove to be a lifeline for gold. Physical demand for gold remains strong, and as more capital is pulled out of stocks that capital could find its way into gold and other precious metals.
In other global markets, the Greek stock market reopened today after being closed for several weeks. Stocks slid well into double-digit losses, and although the sell-off was expected, it may give investors further reason to pause.
Gold may experience a bit of a holding pattern this week heading into Friday’s non-farm payrolls data for July. Investors are looking for further clues about a potential September rate hike, and strong jobs data could potentially give them further expectations of a hike next month.
This month could potentially see volatility in the gold market as many traders take final summer vacations and market liquidity decreases. Net short positions remain very high in gold and the current lack of buying interest could potentially see gold prices fall to sub $1000 per ounce levels before a significant bottom is established.
That being said, gold will also likely be susceptible to a significant short covering rally should risk aversion take further hold. Given the short position and negative sentiment surrounding gold currently, a rally of $100 per ounce or more on short covering is a possibility. Such a rally would likely be sold into, however, unless some type of bullish catalyst presents itself.