The Daily Nugget: Is Gold Waiting For China?

Yesterday the gold price dropped slightly as markets continued to book profits gained from gold’s recent rally.

This seems to be nothing more than a consolidation in both the gold and silver prices, which dropped slightly by 0.4% and 0.8% after hitting a six and a half month high on Tuesday.

This morning HSBC’s Flash China manufacturing purchasing managers’ index for September, stood at 47.8, a slight improvement from August’s nine-month low of 47.6 but nothing to get excited about. Anything below 50 is taken as a sign that the economy is contracting.

This is a good sign for the gold, and therefore silver, price as analysts fully expect China to announce further stimulus.

Not only has China experienced some weak data this morning but PMI data from several major eurozone countries, and the overall eurozone, are expected to also see some weak data this morning. Japan has also seen a decline in exports, for the third month in a row. Later today initial jobless claims, the manufacturing PMI and the Philly Fed Manufacturing index are each expected to show signs of little or no improvement in the US economy.

Analysts seem torn as to whether or not gold will go past $1,800 this year, with some arguing that after China’s (predicted) stimulus announcement there will be no "catalyst" to drive gold above $1,800, a level not seen since November 2011. Credit Suisse disagree, stating "with investment demand gradually increasing and technical momentum positive, we think it is only a matter of time before gold prices make a first breakthrough attempt at $1,800.”

A catalyst, something which changes the rate of a reaction, can certainly be the term attributable to rounds of stimulus from various central banks. However, this does not mean that without that particular catalyst the reaction – in this case the increase in the gold price, will not happen anyway. Not only are there plenty of other catalysts waiting to speed up the drive in the gold price, but it can also happen on its own, as it has been for several years.

As we wrote earlier this week, it seems that we are not now just flipping our attention between the eurozone, to the US, to Asia, depending on which one is having a bad week. They are all having bad weeks, at the same time. Whilst we have known for a while that the global outlook is weakening it seems investors have been slow on the uptake. But this stands the gold rally in good stead as increasing numbers turn to gold as they realise the fragility of the world economic outlook.

The next catalysts are likely to be both the PBOC announcing an increase in stimulus and the Indian wedding season over the next two months.

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