- Gold prices correct in a familiar fashion into the 38.2% ratio.
- Risk events and Evergrande gray rhino developments hinder the market's risk profile.
Update: Gold (XAU/USD) holds on to the recovery moves from a five-week low of around $1,765, up 0.06% intraday, during Tuesday’s Asian session.
In doing so, the yellow metal struggles for a clear direction after downbeat equities directed risk-off flows towards gold, helping it to ignore the firmer US dollar.
Even so, the rebound remains elusive as market sentiment remains sluggish amid an off in China and a lack of major data/events, not to forget mixed concerns over US stimulus and Fed tapering.
Against this backdrop, S&P 500 Futures print mild losses by the press time even as Wall Street benchmarks followed global equities to the south, mainly due to fears emanating from China’s Evergrande saga.
Given the mixed clues and a lack of major catalysts, gold’s corrective pullback may extend ahead of the key Wednesday when Chinese players will be back from the holidays. Also, US Federal Reserve’s (Fed) crucial monetary policy meeting adds importance to the same day.
End of update.
The price of gold is picking up a safe-haven bid as traders prepare for a potentially contagious outcome of not only the Delta spread but the Chinese Evergrande meltdown as well. Investors are also looking for more information about the timing and duration of tapering from the upcoming FOMC meeting.
At the time of writing, XAU/USD has gained 0.43% between a low of $1,742.08 to a high of $1,767.20. The precious metal has moved higher despite a strong bid in the US dollar as well. DXY, an index that measures the Us dollar vs six of its major rivals, is trading within a 93.45 and a 93.18 range on the day, a better bid for its safe-haven allure.
A renewed risk-off tone was set in place last week when investors fretted over the risks of a slowing economy following the disappointment in China’s disappointing Retail Sales and weaker Industrial Production. Then strong US Retail Sales hit and bolstered prospects of early Fed tapering as the FOMC meeting this week approached.
Evergrande, a gray rhino event
In the background, a potential black swan, or rather a gray rhino, (a gray rhino, a term coined by Michele Wucker, an American policy analyst, is a highly probable large threat that is likely to hit the world at large at a certain point of time), had been brewing with the news of China’s second-largest real estate firm Evergrande.
The news has surfaced on the front pages this week and caused a stir in financial markets. More on this here in an article published just ahead of Asia open on Monday: Evergrande: Risk-off tone for APAC, a USD win-win scenario, bad for AUD
In short, If this thing collapse, it could be China’s version of the Lehman Collapse. The world’s most indebted developer has warned Chinese officials it faces a potential default that could roil the nation’s $50 trillion financial system.
The company is calling for regulators to approve the company’s long-delayed stock exchange listing and it has been doing so ever since it mapped out the scenario in an Aug 24 letter to the Guangdong government, according to Bloomberg. The company had sought support for a restructuring proposal needed to secure the listing and avert a cash crunch.
Meanwhile, the commodity sector is feeling the heat and global stocks have had a terrible start to the week amid ongoing global disruptions from the Delta variant and developments surrounding the Evergrande risk in China. Investors have fretted about the spillover risk to the global economy. US stocks were sharply lower, with the S&P 500 down nearly 2% and on pace for its biggest one-day percentage drop in more than four months. Safe-haven flows are likely to benefit USD as markets await the upcoming Fed meeting which could be a headwind for gold prices.
It's Fed week, but does it matter for gold?
Traders are on the lookout for a formal announcement on tapering this week, but they could be disappointed considering the ramp-up in risks associated with the Evergrande developments.
However, as analysts at TD Securities argued, ''the dot plot opens the door to risks of a hawkish surprise''.
''Recall that only two officials need to mark-up their 2022 dots for the median to move higher, while economic projections on inflation should be revised higher. In this context, the 'stagflation' narrative is capturing the market's share of mind, as participants look to a period of high inflation and slowing growth, but this has yet to translate into additional interest for gold.''
Instead, the analysts are of the mind that commodity trading advisors (CTAs) will continue adding shorts in both gold and silver.
''Yet, a cleaner discretionary and trend-following positioning slate argues that recent weakness in gold is unlikely to morph into a rout. However, we still expect silver to underperform gold on a risk-adjusted basis, as a normalization in industrial demand further weighs on the white metal, while flow-effects of tapering are still not priced.''
Gold technical analysis
''While there is room to go to the downside into $1,730 and 10 Aug highs, the price would be expected to stall and correct given the length of last week's drop beyond the daily ATR of $22. The 23.6-50% ratios can be eyed into old the support that has been expected to act as resistance on a restest of the area.''
The price has reached a 38.2% ratio but there could still be some more to go until bears filly reengage again.
The Evergrande situation remains fluid and fundamentals are the driving force at this juncture.
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