Gold Prices and Global Economic Trends
Gold rose on Tuesday morning to $2040 per troy ounce, reaching a two-week high. Positive momentum is driven by risk appetite that has formed on global platforms. One of the reasons for increased demand for the metal could be the weakness in the Chinese stock market.
The trio of leading American indices, S&P500, Dow Jones Industrial Average, Nasdaq100, closed at historic highs on Monday, continuing almost a two-week growth streak after a slight correction at the beginning of the year. The impetus for buying was the news that the U.S. Treasury reduced its bond borrowing plans for the coming months. This implies that more money could go into buying stocks and commodities instead of bonds.
We also note signals from a WSJ journalist covering the Fed's policy. It is believed that he effectively conveys and interprets signals that the FOMC can no longer send during the "quiet period" before the meeting. In his latest article, he noted that a "sharp drop" in inflation poses a new risk for the Fed. This is a significant shift from the inflation threat of the past two years, returning to the narrative dominant after the 2008 crisis when major central banks worked to increase, not restrain, inflation.
This return to an old theme recalls the gold rally from $720 to $1900 per ounce from 2008 to 2011 when there was a shift to zero interest rate policies, and we first saw QE.
Meanwhile, the Chinese market continues to lose investor confidence due to Evergrande's bankruptcy and regulators' unimpressive market and economic support measures. Hong Kong and mainland China stock indices interrupted the recovery that began last week, losing ground for the second trading session, trading near multi-year lows. In these conditions, especially for China, gold once again enjoys the status of a defensive asset.
On the other hand, gold remains in a downward trend since the beginning of the year, although it typically starts the year on a strong note. In years when early weakness is observed in the first couple of weeks, the pressure usually intensifies soon after. We expect to see the manifestation of this trend this week.
The price of a troy ounce may correct down to $1960, approaching the 200-day moving average, where the struggle for the trend is likely to intensify. If the bullish scenario unfolds, movement above $2050 by the end of this week will sharply increase the chances of gold reaching historic highs in the coming weeks.
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