The Comex gold futures rose 1.70% last week when the Chinese Renminbi depreciated unexpectedly on Aug. 11. This week, the gold futures rose 0.38% and ended at $1,116.60 per ounce on Tuesday. In contrast, the Dollar Index dropped 1.07% to $96.52 and the crude oil futures plunged 3.12% to $42.50 per barrel last week.
From the first day of the Renminbi depreciation until this Tuesday, the S&P 500 Index has dropped 0.25%, the Euro Stoxx 50 Index has plummeted 4.89%, and the MSCI Emerging Market Equities has plunged 4.39%. In the same period, the 10-year U.S. Treasury Bond fell 4bp to 2.1943% on Tuesday and the 10-year German Bund yield rallied 6bp to 0.642%.
U.S. and China
In July, the U.S. added 215,000 jobs with the unemployment rate holding steady at 5.3%. The U.S. housing starts rose at an annualized rate of 1.21 million in July, the most since October 2007. The Fed would like to see a further improvement in the labour market and have a better confidence that inflation will move back to two percent before hiking rates. The core PCE index rose 0.3% in June compared to the Fed’s target of 2%.
While low inflation is one factor to consider, another factor is the sudden Chinese Renminbi depreciation last week. The central bank said that the daily fixing of the Chinese Renminbi will align more closely with the spot rate on the previous day, taking into account the supply and demand of the Renminbi as well as the changes in the major currency rates. The daily fixing rate has been steady since the beginning of June at about CNY 6.12. The central bank depreciated the fix by 1.86% on Tuesday and another 2.70% in the next two days but held the reference rate steady since then.
The government cited the need to move towards a market-determined exchange rate but did not expect a continuous depreciation as China’s trade fundamentals are good and its growth has stabilized. The Chinese yuan has appreciated more than 10% in the past year on a real trade-weighted basis. The global ramification of the depreciation can impact the timing of the first Fed rate hike as the global currencies and stock markets tumbled due to the uncertainty in the Renminbi exchange rate and the Chinese economic growth going forward.
Catalysts for gold
As the equity and currency markets become more uncertain and the fear of currency wars rises, gold has received a safe-haven bid. The gold futures traded as high as $1,126 on 12 August but retreated as the commodities sell-off caused deflationary fear. The speculators’ net combined gold positions rose 72.86% during the week endin Aug. 11, pushing the net short positions to 2,794 contracts as the long positions increased 5.64% to 111,949 contracts.
The World Gold Council has reported that the gold demand in China dropped 23% in Q2 to 216.5 tonnes while the global demand dropped to 914.9 tonnes, led by a fall in jewellery demand. Gold prices will swing as some see gold as an alternative asset while others sell gold due to deflation and Fed rate hike concerns.
Kelly was formerly a freelance writer with experience in covering the financial markets. She has been contributing content to Sharps Pixley for the last year and is a key member of our team.