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Gold Could Benefit As China Economic Weakness Impacts Fed Policy
Aug 24,2015 17:33CST
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Gold is expected to witness further gains during the next week.

By  Paul Ploumis 24 Aug 2015  Last updated at 05:55:10 GMT

Gold is expected to witness further gains during the next week.

(Kitco News) - Gold could continue to benefit next week as China’s financial crisis could have more weight on the Federal Reserve’s monetary policy decisions more than domestic economic data, according to some analysts.

Gold’s rally this week started Wednesday afternoon as the market reacted to what was deemed as dovish minutes from the July Federal Open Market Committee (FOMC) meeting. The minutes showed that some committee members were concerned what impact China’s slowing economy, as well as the global equity selloff, could have on the U.S. economy.

Some economists have noted that the comments were made in July, but since then conditions have worsened, forcing China to devalue its currency. Many analysts and economists are expecting that continued financial turmoil in China could delay the Federal Reserve from hiking rates as early as September, which would be U.S. dollar negative and gold positive.

“Gold has captured the imagination of the market once again,” said Adam Button, currency strategist at Forexlive.com “Uncertainty about what the Fed will do in September has left traders with a severe case of indigestion and looking for a safe place to ride out the month ahead.”

The late-week rally helped gold erase the last six weeks of losses. Comex December gold futures ended Friday’s session at $1,159.60 an ounce, up more than 4% on the week.

Although silver managed to extend its winning streak for four weeks, its momentum could be waning as prices close Friday at $15.301 an ounce, up just less than 0.5% since Monday.

Looking ahead, because of gold’s strong gains, optimism is high in the marketplace that this rally will continue in the near-term. According to Kitco’s Wall Street vs Main Street Gold Survey, the majority of both retail investors and market professionals expecting higher prices next week.

This week, 304 people participated in the weekly online gold survey; among the participants, 193 people, or 63% are bullish on gold next week; 74 voters, or 24%, are bearish on the yellow metal, while 37 people, or 12%, are neutral. Last week’s survey showed that 58% of online voters were bullish on the yellow metal.

The results of Kitco’s market professional survey were relatively similar to Main Street’s as a strong majority expects this rally to continue next week. Out of 35 market experts contacted, 18 responded, of which 11, or 61%, said they expect to see higher prices next week. At the same time, four professionals, or 22%, said they see lower prices, and three people, or 17%, are neutral on gold. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.

David Madden, market analyst from IG Markets, said gold’s latest decline from mid-June to July, which dragged prices from around $1,200 an ounce to a new six-year low at $1,072.30 an ounce, was on expectations that the Fed would start hiking rates in September; however, he added that “the worm has now turned,” which means gold has room to move higher in the near-term.

He noted that China’s economic problems are only worsening as recent data showed that China’s manufacturing sector fell to its weakest point in six-and-a-half years.

“The real issue that is going to impact gold this week will be data coming out of China,’ he said.

Matthew Turner, commodity strategist at Macquarie, agreed that the market is focused on China’s impact on U.S. monetary policy; however, he added that nobody really knows how much sway it will have on the Fed.

Turner added that he is neutral on gold, waiting for a new catalyst to push prices higher in the near term; in the meantime, he said he will be listening to Fed speak to determine if the central bank has actually shifted its monetary policy.

Colin Cieszynski, senior market strategist at CMC Markets, said although the market has room to move higher over the shorter term, he thinks the market has put too much emphasis on China’s economic woes and he doesn’t expect that it will have a major impact on the Fed’s decision to raise interest rates.

Although the economic calendar is low on data next week, it is full of Fed speakers: Atlanta Fed President Dennis Lockhart speaks Monday, New York Fed President William Dudley speaks Wednesday and the annual central bankers’ retreat in Jackson Hole, Wyoming, will start Thursday with Fed governor, Stanley Fischer speaking on Saturday.

While China is playing an important role in monetary policy expectations, Phillip Streible, senior market strategist at RJO Futures, said there are other factors in the global marketplace that could help gold maintain its renewed momentum..

“Continued weakness in equity markets, weakness in China and political uncertainty in Greece: all of these have the potential to boost gold higher next week,” he said. “Momentum is on the bulls’ side.”

He added that the 200-day moving average, at $1,189 an ounce, could be the next target bulls have in mind in the near-term.

Although some economists are expecting U.S. economic data to take a back seat to global financial problems, some of the data that could attract some attention includes July’s durable goods report, housing sales data, and the preliminary reading of U.S. second quarter gross domestic product (GDP) all due for release in the week ahead.

Courtesy: Kitco News

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