Posted on August 28, 2015
Gold prices are slightly higher this morning as stocks and crude oil are both weaker and the dollar index trades flat. This has been a very interesting week for traders and investors and many are likely quite happy that today is Friday.
The sharp sell-off in Chinese stocks on Monday sent the U.S. indices into a dive lower. The Dow Jones, for example, recorded its worst drop on record and was down nearly 1100 points Monday morning at one point.
While gold has rallied this last week, moving from the $1120 area up to the $1170 area, the market did see some selling come in during the “chaos” that was this week.
Investors are likely wondering if the worst of the volatility and selling is over or if there may be more to come.
Stocks appear to have made a significant technical reversal on the daily chart. The markets may try to recover lost ground seen in recent days, and shorts may potentially get caught on the wrong side of the trade.
That being said, the Chinese stock market can potentially help fuel a rally back, or it can potentially cause further significant selling.
Another down day of 5, 6, 7, or 8 percent in Chinese equities will not do global stock markets any favors. While China has taken some aggressive steps in recent weeks to try to boost its economy and calm its markets, one has to wonder if it will be enough.
Gold will face an interesting conundrum if China continues to show signs of slowing. On one hand, risk aversion from concerns about China could potentially drive gold and other perceived safe-haven assets higher. On the other hand, however, is the fact that China is a huge consumer of commodities. Any weakness in China may weigh on the commodity sector as a whole and could potentially keep a lid on gold prices.
Another consideration is what Chinese investors may do with their money if stocks continue to fall. Capital taken from equity markets could potentially find its way into gold and other precious metals giving these markets a boost.
The question of whether or not gold has found a bottom remains to be seen. Recent price action may suggest that a near-term bottom is in place. Although gold saw some selling this week, the market is catching a bid today and could potentially make another run at the $1170 level in the coming days. In the absence of additional market volatility, gold may potentially remain somewhat subdued until more clarity surrounding interest rates in the U.S. is seen.