While the US dollar is getting stronger and China’s economic data continues to disappoint, prices of commodities are facing downward pressure.
The prices of crude oil and copper, the typical cyclical commodities, fell below the technical resistance levels last week. Only gold stayed relatively stable at US$1,080 per ounce, benefiting from the risk aversion in the market after the tragedy in Paris.
Although deaths happen every day in Syria and other regions where the Islamic State is wreaking havoc, the Paris carnage triggered a bigger shock in the market. Global investors worry that more attacks will follow as they fear that many of the terrorists have sneaked into Europe by posing as refugees.
The terrorist threat is likely to have an impact on European economies, especially those that rely heavily on tourism.
Chinese big spenders used to favor Europe as a shopping destination because of the weak euro. It is interesting to see whether they will return to Hong Kong because of safety concerns over Europe.
The global economic environment is complicated as it is. Emerging markets, including China, are slowing down, while the United States is about to raise its interest rates soon.
Also, prices of commodities will have to be re-evaluated to factor in the terrorist threat after the previous declines. The market is making more conservative allocations.
Gold price is rising as risk aversion triggers an increase in demand. But how long will the impact last?
As the possibility of a rate rise in the United States in December gets higher, gold, which does not bring interest income, will become less attractive.
Besides, if the economic conditions in Europe turn for the worse as a result of the terrorist threat, euro will become weaker. In other words, the US dollar will become much stronger.
It is possible, under special circumstances, for the dollar and gold price to be both strong. But as the two usually have an inverse relationship, gold will face larger downward pressure while the dollar will see a stronger appreciation trend.
One more thing to watch: whether the money outflow from the gold market will reverse.
The holding by gold exchange-trade funds is at the lowest level since 2010. In the meantime, gold speculative net-long positioning increased to nearly 160,000 contracts in October from less than 30,000 in September after expectation of a US rate hike declined in September.
But as the possibility of a Fed “liftoff” gets higher, gold speculative net-long positioning is likely to move in the opposite direction. The change will have a major influence on the gold price.
This article appeared in the Hong Kong Economic Journal on Nov. 17.
Translation by Myssie You
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