China chaos good news for safe haven gold?
Photo: Digital Currency
China's currency chaos has proven good news for gold investors this week, as the precious metal enjoyed a rally in prices.
Gold has become an established safe haven asset for investors, thanks to its relatively stable value and lack of correlation to wider market trends. As the global economy has begun to recover from the financial crisis of 2007, though, the outlook has improved with the US Federal Reserve raising interest rates and the dollar growing stronger. As a result, the metal has seen something of a slump in recent months. Nonetheless, 2016 has gotten off to a shiny start, mostly as a result of China's ongoing economic woes.
China's currency continued to weaken this week, prompting trading on the Chinese stock market to be suspended within just 30 minutes on Thursday 7th January - the country's shortest day of trading in history.
In response, gold rallied to reach over $1,100 an ounce for the first time in over two months.
The chaos in China arrived on the back of a week of growing macroeconomic concerns: the dollar was softer, as the Federal Reserve announced that US interest rate hikes would be very gradual in the coming year, while tensions rose in the Middle East and in Korea. When North Korea tested a nuclear device on Wednesday, fears raced higher, while gold rallied for the third session in a row, building upon a four-week higher of $1,083.30 recorded on Monday.
"Gold is dusting off its credentials as the go-to commodity in troubled times and its producers are reaping the benefits," says Bloomberg.
Does that mean 2016 is the year for the precious metal's safe haven status to return?
The current climate “reminds me of the crisis we had in 2008,” billionaire George Soros told the news agency. In that year, bullion futures rose 5.5 per cent, before rising 24 per cent in 2009 and 30 per cent in 2010.
RBC Capital Markets predicts that gold's value of $1,100 will set a trend for the next 12 months, with the metal trading between $1,050 and $1,200.
"As seen in 2004, we expect gold to lead a commodity recovery," Stephen Walker, head of global mining research at the group, said in a report published on Thursday.
Nonetheless, there is no guarantee that gold is back in investors' good books.
"It should have reacted more aggressively," one precious metals trader in Hong
Kong told Reuters on Wednesday. Gold also faces potential headwind from oil prices, while America's ongoing interest rate rises, even though gradual, are forecast by some experts to push gold's value back down below the $1,000 threshold.
"Gold's strength is probably going to be relatively short term, but there is an upside risk to gold, if the view that China is going to pull the whole world into recession becomes stronger," Citigroup metals strategist David Wilson told Reuters.
"But if the U.S. and Europe continue to grow, gold will go weaker ... Chinese stock markets had got massively over inflated because a lot of money piled into it and now people have come back to reality."