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Article / 12 August 2015 at 9:57 GMT

Is gold getting back its moxie?

Head of Commodity Strategy / Saxo Bank
Denmark
  • Crude and copper losing on risk of import slowdown in China
  • Fed rate hike hopes suffer because of yuan devaluation
  • Gold may rebound should Chinese investors seek alternatives

gold
 Better times beckon for gold miners should Chinese investors decide it's a suitable sanctuary. Photo: iStock
 

By Ole Hansen

Global financial markets are being rocked by the surprise devaluation news from China. Equities, especially those in companies exporting to or competing with China, are being sold while safety is being sought in bonds. 

Commodities are also reeling, with oil, copper and soybeans selling off while gold might see a change in sentiment as Chinese investors seek a hedge against a falling currency and also because Fed hike expectations are now reduced.

Commodities that are most dependent on China are hurting the most:
Two day commodity performances
 
What a difference one announcement makes, especially when that announcement comes from China and it involves its currency which has been very steady for a long time against the dollar while many other currencies have weakened. 

Commodities recovered a bit on Monday only to be struck down in flames on Tuesday when the Peoples Bank of China announced its new fixing mechanism which essentially opens the door for a continued devaluation. The fact that the weakening of the currency has continued today has left the market with the unpleasant guessing game of how far they are prepared to let it go. Our FX Strategist John Hardy is looking at a potential 10% devaluation before the PBoC halts the slide. 

Chinese offshore renminbi – watch the mighty dollar become mightier by the minute:
USDCNH


Source: Saxo Bank

WTI crude oil closed at the lowest level in six years yesterday following a day where future Chinese demand was being questioned and where Opec said in its monthly report that July production had reached a new 3-year high. 

Copper, meanwhile, has reached a new 6-year low and in a panic selloff earlier today nickel lost 15% in a matter of minutes. 

Such an environment of extreme uncertainty has the potential for changing the outlook for gold with Chinese investors seeking alternative investments and a hedge against a declining currency while the pace and timing of US rate rises have been called into question.

Gold priced in Chinese offshore renminbi has seen a dramatic recovery during these past few days:
Gold in offshore Chinese Renminbi

 Source: Saxo Bank

Priced in dollars it has yet to break any significant levels but considering the very low exposure or even short positioning among hedge funds it will not take a lot to attract short covering and new allocations. 

The collapse on July 20 took the price below the previous low at $1132 and it would probably take a break above this level to attract aggressive short covering. According to estimates, short covering alone could take the price higher by $50 and no doubt some of the buying seen already has come from position squaring. 

Spot Gold
 Source: Saxo Bank
 

– Edited by Clare MacCarthy

 

Ole Hansen is head of commodity strategy at Saxo Bank




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