Mixed Global Economic Data, Oil Rally Pushed Gold Down
Gold prices have been down for two consecutive trading days now, with gold for April delivery dropping by 0.4% to close at $1,257 on Wednesday, March 9. The prior-day trading session saw gold for April delivery shed about 0.1% of its value to close at 1,262.90 per troy ounce.
The prices are as quoted on the Comex side of the New York Mercantile Exchange. The drop in recent gold prices is a reflection of a weakening demand for gold as a ‘safe haven’ asset. Overall, though, 2016 has been a good year for gold, with the commodity up about 18% year-to-date. Analysts have pointed to two major reasons why the ‘safe haven’ appeal of gold eroded a bit on Tuesday and Wednesday.
Mixed global economic data
On Tuesday, China reported that its monthly export fell 25.4% compared to the prior-year month on a dollar basis. This was China’s largest drop in export since the financial crisis and it was the eight month of consecutive drop in Chinese export. China’s General Administration of Customs had reported an 11.2% drop in January.
Chinese imports also declined by 13.8% in February, vs. the 18.8% decline in January.
Being the world’s largest producer and the second-largest consumer of gold, the decline in Chinese import and export has fostered fears that the demand for gold is eroding, spurring investors to take lock gains after weeks of rally in gold prices.
Investors also await the outcome of the European Central Bank meeting scheduled for Thursday, March 10. The meeting is expected to be one that provides working measure to stimulate economies around the eurozone. Analysts expect that the ECB will further push interest rates into the ostensible negative zone.
While such a move by the ECB should theoretically improve the appeal of investing in gold, such stimulation measure is likely to weaken the Euro against the dollar. And since gold is primarily priced in US dollars, a weakened Euro would mean that gold becomes more expensive in the European market. Partly channeling this uncertainty, gold fell on Wednesday.
Other analysts say the slight decline is partly attributable to investors locking in gains ahead of Fed meeting scheduled for March 15 to March 16. Investors are hoping that the Fed will not tighten its monetary policy further. Analysts believe that if the Fed holds off increasing rate, gold is likely to hit the $1300 per ounce mark.
Crude oil recovery
Crude oil has been on a bit of a rally over the past month, with the Brent crude oil increasing by over 40% from its February low of $27 per barrel. This is also putting pressure on recent gold prices because of the economic sensitivity that come with oil price movement.
Put simply, as oil seems to be improving slowly, there’s a perception in the market that economic situations are improving – even if they aren’t. Flipping the coin, a perception that the economy is improving is never good for gold, since it is considered a safe haven asset.In the Wednesday trading session, this theory held to be true as a rebound in oil prices made the market believe the economy is magically better, pushing stocks higher on Wednesday, hence unlashing market forces against gold.
Importantly though, Investors will want to keep tabs on the outcome of ECB meeting as well as that of the Fed for signals on where gold prices may be headed in the near term.