Gold trading outlook: futures jump on China concerns

Gold rose on Tuesday, extending its biggest monthly advance since January, as fresh downbeat data from China rekindled fears of deteriorating conditions in the worlds second-biggest economy, boosting demand for safe haven assets.

Comex gold for delivery in December traded 0.89% higher at $1 142.6 per share at 06:50 GMT, shifting in a daily range of $1 143.5 – $1 133.8. The contract fell 0.1% on Monday, settling August 3.6% higher.

Activity in Chinas sector of manufacturing contracted for the first time last month since February, government data showed, with the corresponding manufacturing Purchasing Managers Index coming in at a 3-year low of 49.7 from 50.0 in July.

A separate private report showed the contraction in manufacturing activity continued for a sixth straight month, with the Caixin China General Manufacturing PMI coming in at 47.3, slightly up from a preliminary estimate of 47.1, but down from 47.8 in July. As purchasing activity declined at the fastest rate since March 2009, output contracted by the most in 45 months and companies cut their workforce count for the 22nd consecutive month.

Dr. He Fan, Chief Economist at Caixin Insight Group, commented on the report: “Recent volatilities in global financial markets could weigh down on the real economy, and a pessimistic outlook may become self-fulfilling. Macroeconomic regulations and controls must continue and fresh reform measures must be introduced. Finetuning should go hand in hand with speedier implementation of structural reform in order to release the full potential of growth and lead the market to confidence.”

The slowdown in Chinese economic growth led to last months devaluation of the yuan and a stock market rout that helped gold rebound from a 5-1/2-year low touched in late July as investors bet that the global market turmoil would keep the Federal Reserve from raising interest rates in September. Strong US economic data, however, has underpinned the US dollar and has kept the possibility of a Fed move this month on the table.

The Bureau of Economic Analysis revised up its second-quarter GDP estimate to 3.7% last week, up from an initial measure of 2.3%, which exceeded analysts’ projections of 3.2% growth. Prior reports showing solid employment, housing and business activity readings have also helped support the US dollar and limit gold’s upside momentum during the recent turmoil.

The US dollar index contract for settlement in September traded 0.45% lower at 95.420 at 06:50 GMT, swinging in a daily range of 95.890 – 95.380. The contract slid 0.3% on Monday to 95.854 following a 1.2% jump last week.

Fed Vice Chairman Stanley Fischer said last week that easing volatility will possibly pave the way for a rate hike and that there is a “good reason” to believe inflation will accelerate. The Federal Reserve next meets on September 16-17th to decide on monetary policy, with a minority of analysts expecting a vote in favor of higher borrowing costs, while others tie a possible move to the pace of stabilization of Chinese markets and upcoming US data, including Friday’s all-important non-farm payrolls.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETF, were unchanged for a second day on Monday at 682.59 metric tons, the highest since July 23rd. Still, holdings in the fund remain about 49.5% below a peak of 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 $1 131.3. If the contract breaks its first resistance level at $1 137.5, next barrier will be at $1 142.6. In case the second key resistance is broken, the precious metal may attempt to advance to $1 148.8.

If the contract manages to breach the S1 level at $1 126.2, it will next see support at $1 120.0. With this second key support broken, movement to the downside may extend to $1 114.9.

In weekly terms, the central pivot point is at $1 140.2. The three key resistance levels are as follows: R1 – $1 163.6, R2 – $1 193.1, R3 – $1 216.5. The three key support levels are: S1 – $1 110.7, S2 – $1 087.3, S3 – $1 057.8.