Gold Bounces Whilst ASX 200 Drops to Negative For The Year

Last week there was some turmoil as China surprised markets with three consecutive devaluations of the yuan. The news was unexpected and was a pretty big signal that things may not be a rosy as they appear in China.

Obviously not good news for Australia and we saw the ASX 200 index drop to 5356. Aussie banks raising capital saw a sell off for the financials. So Aussie stocks are now flat for the year and we are sitting at a 10% correction from the April high. There appears to be a shrinking set of ASX winners that everyone is chasing. Finding value in blue chips is becoming increasingly hard, more on this can be found here.

Spot gold in AUD is up around 4% from 1st of January, so is performing comparatively well.

The Aussie dollar trades around 0.737 US cents this morning, putting gold in AUD at $1,513, silver at $20.88 per ounce. Gold in USD has seen a bit of a bounce since the $1,080 recent bottom. There were a few indicators on the daily chart that were signalling oversold last week, so a bounce was expected. The question is how long will it last?

Gold in USD needs to rally past $1,200 to renew confidence in the metal on the short term, so if we top out somewhere between here and US$1,200, we could see renewed weakness in the USD gold price. We see on the chart below that we have some upside momentum, and are still below the 50 and 100 day moving averages, so hypothetically have a bit of room on the upside yet.

A few weeks ago it was reported that Hedge Funds were net short on gold for the first time since 2006, so sentiment towards the metal is at extremes, despite gold performing better than many other commodities in the past 12 months.

We await to see if this short term bounce can turn into a decent rally.

JOHN FEENEY

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