Gold trading outlook: futures hold near 7-week highs on China fears

Gold eased in early European trading on Monday but held close to Fridays 7-week high as fears over a slowing Chinese economy forced investors away from riskier assets, sending Asian equities tumbling and spurring demand for safe haven assets.

Gold for delivery in December traded 0.41% lower at $1 154.9 per troy ounce at 07:02 GMT, shifting in a daily range of $1 165.0 – $1 151.8. The contract rose to $1 167.9 on Friday, the highest since July 7th, and settled the day 0.6% higher at $1 159.6, closing the week up 4.2%. This was the biggest weekly gain since January.

The US dollar extended its decline as Asian equities plummeted to three-year lows amid fears that a China-led global economic slowdown will hold the Federal Reserve from raising interest rates in September. And although a hike is broadly expected by the end of the year, it would likely be very small, analysts predict, leaving rates in negative territory in real terms.

A private report last week showed a further drop in Chinese manufacturing activity, with the preliminary manufacturing Purchasing Managers’ Index sliding to a 77-month low of 47.1 in August, worse than a projected drop to 47.7 from 47.8 in July, as both domestic and export demand decreased at a faster pace. The flash China General Manufacturing Output Index came in at a 45-month low of 46.6 from 47.1 in July.

Chinese stocks tumbled about 9% on Monday, extending sharp declines from last week amid investor disappointment that Beijing abstained from providing expected policy support over the weekend.

“Markets are nervous — and this is always good news for gold,” said for Bloomberg Gavin Wendt, managing director of Mine Life Pty in Sydney. “True investors have once again used market weakness as a tremendous buying opportunity, reinforcing my positive view on gold.”

Fears of a currency war had helped December gold rebound from a 5-1/2-year low touched in late July and the precious metal now traded 7.6% higher above that trough. In addition to the yuan devaluation, sluggish US inflation data last week helped boost golds allure, reminding investors after recent robust housing and employment numbers that a rate hike in September is far from certain.

The US dollar index contract for settlement in September traded 0.58% lower at 94.450 at 07:02 GMT, having earlier dropped to 94.145, the lowest since June 22nd. The US currency gauge tumbled 1% on Friday to 95.005, closing the week 1.6% lower following a 1.1% decline the prior week.

Reflecting increased safe haven demand, assets in the SPDR Gold Trust, the biggest bullion-backed ETF, rose for a second day on Friday, adding 2.39 tons to a total 677.83 tons and further rebounding from a recent 7-year low. Holdings in the fund have shrunk by nearly 50% since peaking at at 1353.35 tons in December 2012.

Pivot points

According to Binary Tribune’s daily analysis, December gold’s central pivot point on the Comex stands at $1 158.7. If the contract breaks its first resistance level at $1 168.8, next barrier will be at $1 178.1. In case the second key resistance is broken, the precious metal may attempt to advance to $1 188.2.

If the contract manages to breach the S1 level at $1 149.4, it will next see support at $1 139.3. With this second key support broken, movement to the downside may extend to $1 130.0.

In weekly terms, the central pivot point is at $1 145.3. The three key resistance levels are as follows: R1 – $1 182.2, R2 – $1 204.7, R3 – $1 241.6. The three key support levels are: S1 – $1 122.8, S2 – $1 085.9, S3 – $1 063.4.