Perhaps this sounds surprising to some, but gold has practically not reacted at all to the record devaluation of the yuan, nor did it react to the Chinese stock market situation, or even Black Monday which came with a record fall in markets throughout the world. Gold is hardly reacting at all to what is happening in the world, with the probable exception of demand being down from jewelry producer states such as India and China, whose country’s economic growth is slowing.
Pretty much the sole factor which the metal is responding to is the cost of the dollar, of which gold is denominated in. Dollar growth means an automatic fall for gold, and vice versa. Since the beginning of August to Black Monday, the dollar has been falling. The DXY dollar index was down from 98.3 to 92.7 during this time. The EUR/USD grew on the back of this during this period from 1.0850 to 1.1710. This fall of the dollar was caused most of all by a market reassessment of whether the US Federal Reserve will put up its rates in September. Contradictory macroeconomic data is indicating a mixed bag of risks from a hastening of inflation growth towards a slowing in economic growth, coupled with announcements by some official representatives of the US market regulator hinting that rates might not be touched until even later this year than previously thought. As a result, reacting to the fall of the dollar, gold has gained value – from 1,080 to 1,170 USD per troy ounce – to August 24th.
However, Black Monday was marked by a pivotal moment for the market. Erupting panic led to market capital flight from a risk and a growth in demand for safe haven assets, for quality and for what is known today as “qualities”: i.e. US sate bonds and the USD itself. As a result, since Monday, the DXY has restored from 92.7 to 95.4. The EUR/USD is down from 1.1770 to 1.1300. In reverse paribus with the dollar growth, gold cheapened from 1,170 to 1.125 USD per troy ounce.
It makes sense to think that the dollar’s fall was a short term thing and that the currency gaining more ground is due to continue. The strength of the dollar is linked first and foremost to the US coming out of the 2008-2009 crisis in a better state than other developed nations and in the meantime recovering economically with more gusto. The US growth in its Q2 GDP by 2.3% (YOY) is only behind that of the UK and leaves other G7 countries in its dust. US unemployment has returned practically to pre-crisis levels and is almost half of European levels. A year ago, the US was feeling the effects of its quantitative easing program, whilst this only got underway in March this year for Europe and is due to extend to September of next year at the very earliest. As such, the dollar is quite likely to dominate for the coming years.
This in turn means that gold will, in the best of cases, remain at its current levels and, at worst, break its 1,077 support and head down to 1,044 and below USD per ounce. In light of this, it’s worth putting off any gold purchases, whether for speculative or investment purposes.