At the moment Gold’s sensitivity towards the US Sino matter is at its highest levels as the precious metal been very match the next best choice for traders during the past days. Massive volatility has been observed and especially yesterday and the day before when the Chinese Index’s moved higher along with their stocks and on the opposite the US dollar seemed out of breathe for the moment.
Gold, now at cheaper levels since are very last report, seemed to suddenly wake up after a long sleep, as traders utilized it for quick trades and ultimately increased volatility levels. Gold prices settled slightly higher Wednesday, locking its second day in positive territory as the U.S. dollar and U.S. government bond yields both backed down, giving space for the precious metal to climb.
On a wider perspective, investors demand for Gold was down in the second quarter. Holdings in global gold-backed ETFs dropped in July and Gold price performance was a large contributor to outflows as it fell over 2% in US dollar terms.
Moreover, the Fed’s plans to raise rates further this year have also assisted in plunging the shiny metals prices as the fact is known to strengthen the USD. The USD is negatively correlated to Gold and an advancement for the greenback equals a reverse for the precious metal. The greenback has been strengthening since late April were Gold started heading downwards breaking its $1,300 round level and now aiming for the $1,200 level.
Evidently, towards the end of July, money managers increase their net short positions bringing them to 41,087 contracts, the largest since data has become available to the public in 2006. It could be the case that, Gold has not reached rocked bottom yet.
On the other hand, countries with depreciating currencies like the Chinese Yuan and the Iranian Rial have increased their investments in Gold. Their aim could be to increase demand for gold while a weakening currency seems to prevail. However, in our opinion someone could also rely on long-term gold investment in order to escape complete devaluation in a desperate situation.
On another front, a very significant development has been enacted that is related to the banking system. According to Basel III regulations, banks are required to match cash holdings with proportional Gold reserves to protect itself from any strong price movements. The percentage of the matching until now, has been 85%. However, the percentage has now been set lower to 50%. According to Reuters, LBMA the London Bullion Market Association has been able to convince the European Union to ease the Gold requirements and plans to keep going for even lower levels, as a way to reduce costs for banks. This developments creates some questionable points for analysts and market participants. Since banks are now allowing less exposure to be hedged on Gold, we can reasonably question the metals traditional power and dominance as a safe haven. Is this a new era we are moving into, were gold is turning into an ordinary financial instrument?
Gold rallied in yesterday’s US session gaining some 4 dollars on an upward movement after it had been lower in the European morning session when it was trading under the $1,210 psychological threshold. Golds upswing could continue today as traders may use it as a hedge instrument for any further economic uncertainty. If the precious metal is undertaken by a bullish movement we could see it move higher aiming for the $1,216.37 resistance level and remain nearby that price. Technically, the RSI indicator in the 1 hour chart remains near the reading of 50, implying a rather indecisive market. Should traders favor Gold short positions, we could see the shiny metal moving lower breaking the $1,210.27 support level and aim for the $1,207.33 support barrier. Also Gold could remain on a sideways movements between the $1,216.37 resistance line and the $1,210.27 Support level.