GOLD PRICES quickly touched a new 7-week high of $1169 per ounce on Tuesday morning in London, while European and US stock market indices bounced back after the shockwaves sent by the recent sharp decline of Chinese equities.
Silver fell to $14.83 per ounce, while other commodities came under bigger pressure. Brent crude oil remained near $45, the 6.5-year low to which it fell yesterday.
The Shanghai Composite index sharply fell by 7.6%, hitting its lowest levels since December. Japan’s Nikkei index also closed 4% lower.
Today China’s central bank cut its benchmark lending rate for the fifth time since November in an attempt to boost its exports. According to Bloomberg, this was seen by many analysts as evidence that Beijing is concerned about their slowing economy.
Investors also became increasingly skeptical about Beijing’s ability to control the situation.
“What happened yesterday was purely panic,” said Peter Dixon, a global economist at Commerzbank.
Despite the nosedive of Asian stock markets, European shares rallied on Tuesday, shrugging off the further decline in China. The FTSE 100 increased by almost 2% at 6,003.72, while Germany's Dax and France’s Cac 40 were both up by more than 3%.
The demand in gold was boosted by the recent global equity slump due to the metal’s reputation as a safe-haven asset. After a short hike to $1169, gold prices fell back to stay around the key psychological level of $1150 per ounce. Gold prices in dollar terms have gone up by 6% so far this month.
“Gold is holding its own well despite the heavy losses suffered by commodities across the board,” an analyst from Commerzbank said in a daily note.
“Looking further ahead, the [US interest] rates outlook has become more gold-friendly in our view, and the metal could regain the 1180/1230 zone,” reckons Tom Kendall from ICBC Bank.
Meanwhile, gold prices in China today fell below London’s international benchmark for the first time since 8th July, offering a discount of $1.69 per ounce.
This would usually indicate that the local demand is weak. However, despite the discount on Shanghai prices, the volume of traded local gold contracts rose to 19.978 billion on Tuesday, compared to 17.276 billion yesterday.
This could be a margin call due to the highly volatile local equity market, as investors are now forced to sell other assets, even at lower prices, to pay back their borrowed cash, as a trader in London suggested.
Back in Europe, German business confidence unexpectedly rose in August. The Ifo institute’s business climate index climbed to 108.3 in August from 108 in July, despite negative forecasts by economists.
Companies brushed off concerns that China’s slowdown would drag on the nation’s economic growth, according to Bloomberg.
By Steffen Grosshauser