Comex Gold Hits Three-Week High On Dollar, Stock Weakness

By  Paul Ploumis 13 Aug 2015  Last updated at  03:10:04 GMT

(Kitco News) - Gold futures hit their highest level in three weeks Wednesday as traders snapped up the yellow metal while equities and the U.S. dollar weakened, all related to events in China.

As of 1:34 p.m. EDT, Comex December gold was up $15.40, or 1.4%, to $1,123.10 an ounce. The contract got as high as $1,125.50, its most muscular level since July 20. The most-active gold futures have now risen five trading days in a row.

September silver futures added 19.1 cents, or 1.3%, to $15.475 an ounce. They peaked at $15.57, a level not seen since July 13.

“We’re starting to see stocks sell off, the dollar sell off and deflationary scares,” said Daniel Pavilonis, senior market strategist with RJO Futures. “There is a flight to quality into things like gold.”

Some buy stops may have been triggered, prompting traders with short, or bearish, bets to buy to offset their positions, he explained. Stops are pre-placed orders triggered when certain chart points are hit.

China’s move to devalue its currency Tuesday prompted worries about the health of the world’s second-largest economy and whether weakness will spill over to other nations. That in turn has exerted pressure on equities. Around 1:30 p.m. EDT, the Dow Jones Industrial Average was lower by around 113 points, and earlier in the session was much weaker still.

“The impetus of course has been China and weak stocks,” said George Gero, precious-metals strategist with RBC Capital Markets Global Futures. “Commodity traders forget they have to expect the unexpected.”

Previously, gold was “off the radar” of investors due to muscular equities, he continued.

“Now, you had a surprise with stocks slumping because of China,” Gero continued. “So some haven seekers have been returning.”

At the moment, “the path of least resistance has been higher” for gold, Gero explained. Now, he commented, there is potential for profit-taking both from shorts who had winning positions prior to the recent bounce, as well as fresh longs who have gains in recent sessions.

Meanwhile, the U.S. dollar has come under pressure. Some observers cited reports that as China’s currency fell, Chinese authorities intervened to stem the yuan’s slide. There is also some market conjecture that perhaps this week’s events will cause the Federal Reserve to hold off starting its expected tightening of interest rates yet this year.

“All you have to do is point to the dollar,” said Jim Comiskey, senior account executive with Archer Financial Services, in explaining gold’s gains. The September dollar index was down 1.125 points to 96.210. “As long as the dollar comes under this kind of pressure, I think the metals will continue to rally.”

Pavilonis said there is potential for the greenback to sell off further should the market start to question whether the Federal Open Market Committee will raise U.S. rates in the not-too-distant future after all. Previously, expectations for a hike as soon as next month had bolstered the greenback and undercut gold, which often moves inversely to the dollar.

"The (expected) rate lift-off is between September and December,” Pavilonis said. “But they’re going to need some time most likely to digest this information (about China and its impact on the economy). They’re probably going to want to see how the market reacts to this.”

Comiskey cautioned that it often does not take much to move prices in summertime markets, partially explaining big moves. The impact of any buying or selling can be exacerbated in light volume.

“This whole Chinese devaluation is a completely new dynamic on the world stage,” Comiskey said. “First of all, they tried to explain it as a one-off…then what did they do? They devalued it again the next day. So this isn’t a one-off. This is an act of desperation by the Chinese….”

And, Comiskey continued, the “race to debase (currencies) has basically now hit the second-biggest central bank in order to spur their exports.”

After a limited slate of U.S. economic data so far this week, the pace picks up Thursday. The government is scheduled to report both weekly jobless claims and July retail sales at 8:30 a.m. EDT.

Courtesy: Kitco News