New Year, New Worries Spark Gold
Today’s Spotlight Market
Gold futures started off the New Year with a strong close due to traders heading for higher ground amid Saudi Arabia-Iran tension and a sell-off in Chinese equities. Chinese manufacturing took another hit, as the Caixin China manufacturing purchasing managers index fell to 48.2 in December from 48.6 in November. This marks 10 consecutive months of sub-50 readings for the index. A reading below 50 indicates a contraction. The report gave traders in Shanghai renewed fears over the state of the manufacturing sector and sent Chinese stocks tumbling 7% and halting trading.
Fundamentals
The Chinese manufacturing fears are nothing new to the market, but there is growing frustration that all of the steps that the government has taken to stabilize the economy have failed to this point. This can be seen as mixed for Gold. On one hand, the knee jerk reaction drives traders to flight to quality plays like Gold. On the other hand, the continued slowdown of the Chinese economy and higher US interest rates all but eliminate the threat of inflation. While we are on the topic of inflation, the recent confrontation between Saudi Arabia and Iran over the Saudi execution of a prominent Shiite cleric presents an interesting conundrum for OPEC and the Oil market, as a whole. The Saudis have pumped Oil at a record pace and encouraged other members to follow suit, while Iran has called for price stabilization. The rift could create a new flood of Oil from OPEC countries, especially Sunni nations aligned with the Saudis. This could put further pressure on commodity prices and lessen inflation worries. The Dollar Index has been stronger over the past several sessions, which may pressure Gold prices. There is little negative news for the US currency, so traders have a largely neutral to slightly bullish outlook for the currency in the near-term.
Technical Notes? -? View Today’s Chart
Turning to the chart, we see the February Gold contract bouncing off the 1050 level twice in recent weeks, confirming support at the level. However, prices have had a tough go of it trying to get upside momentum. As a result, the market has been largely range bound between the 1050 and 1085 levels. If the market is able to break the 1085 level on the upside, prices may trade into the 1100?s, possibly testing the 1150 mark. On the downside, this support level can be viewed as especially critical, as failure to hold this support level could send prices toward the 1000 mark with momentum.
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