Gold Prices Close to 3-Week High amid Sliding Asian Stock Markets

GOLD PRICES touched a high of $1124 per ounce on Wednesday morning in London, following global equities weakening on concerns over the Chinese currency and stocks.

Silver fell through the psychologically important level of $15.00 per ounce and briefly touched $14.74. Due to the widening gap, the gold/silver ratio climbed to a four-week high of more than 75.

According to Bloomberg, investors’ holdings in gold-backed exchange-traded products (ETP) are close to their lowest level since 2009.

Investors were waiting for the release of the Federal Reserve minutes which may give further clues on the timing of an interest rate increase after a jump in U.S. housing starts.

Gold prices rose well above $1120 per ounce this morning nearing the 3½-week high it reached last Thursday. The rapid price recovery confirmed that the lower prices generate higher demand among price-sensitive investors.

Last week, gold demand saw its biggest weekly jump since June after China devaluated the yuan. On Monday, the People’s Bank of China unexpectedly started trimming the value of its currency to a multi-year low against the US-dollar.

Asian shares retreated to two-year lows after Chinese stocks wildly oscillated, continuing to raise concerns about the stability of the world’s second largest economy.

While the devaluation provided gold with temporary support, the metal will face “some headwinds” from the volatility in the Asian markets and the longer term recovery of the U.S. economy, said Vyanne Lai, economist at National Australia Bank Ltd.

Last week, China announced it had increased its gold reserves in July by further 19 tonnes, increasing its total holdings to 1677 tonnes.

Financial markets were also looking at the minutes from the Fed’s last meeting in July for guidance on the timing and pace of tightening monetary policy. The uncertainty about when the Fed might raise the interest rates currently speak against significantly higher gold prices.

The fact that the number of U.S. new-home construction climbed in July to the highest level in almost eight years also supported the perception that the Fed would hike interest rates in September, although most analysts expect a gradual approach.

The rise of US interest rates would be the first since 2006 and would reduce the appeal of non-interest bearing assets such as gold.

Back in Europe, the German parliament seemed set to back a third bailout for Greece today.  Although several members of the Bundestag said they would oppose the new € 86bn aid package, Germany’s Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble were pressing decision-makers to back the move.

By Steffen Grosshauser