(Kitco News) - Gold futures remained steady late Monday morning, drawing a safe-haven bid from a freefall in global equity and commodity markets, with ideas this could prompt the Federal Reserve to hold off on tightening U.S. interest rates, analysts said.

However, even though the yellow metal hit a fresh six-week high, it also is not racing sharply ahead – as it did on Friday when stocks also tumbled -- with traders reporting that some investors are having to sell in order to raise cash to cover losses elsewhere. Also, some technical-chart resistance may have formed around the 100-day moving average.

China’s main stock index tumbled 8.5% overnight, erasing gains for the year amid continued worries about the health of the world’s second-largest economy. Around 11:30 a.m. EDT, the Dow Jones Industrial Average was down by around 450 points after earlier losses of more than 1,000 points.

Crude oil, copper and aluminum all hit their lowest levels since 2009. Copper, silver, platinum and palladium – which have far more industrial applications than gold -- were all down by 2.5% or more.

Against this backdrop, December gold was 30 cents higher at $1,159.90 an ounce. Mining equities, meanwhile, bounced off of their lowest levels of the session.

The New York Stock Exchange Arca Gold Bugs index (HUI) fell 1.3323 points to 125.3842, but was well up from an earlier low of 122.3744. The Market Vectors Gold Miners exchange-traded fund (GDX), which consists of stocks of gold-mining companies, was down 23 cents to $15.16 after an earlier low of $14.78.

Barrick Gold Corp. (NYSE: ABX) the world’s largest gold producer, was down 22 cents to $7.79, but up from an early low of $7.56. Goldcorp Inc. (NYSE: GG) was down just 6 cents to $15.43 and for a while had flipped higher, after initially sagging as far as $15.06.  Freeport-McMoRan Inc. (NYSE: FCX), the world’s largest publicly traded copper company but also a major gold producer due to mining of the metal as a by-product in Indonesia, was still sharply weaker, however. Shares were down 62 cents to $8.96 although up from an $8.16 bottom.

“It’s been pretty volatile,” said Caesar Bryan, portfolio manager for the Gabelli Gold Fund.

Mining stocks were beaten up worse than gold earlier this summer when the yellow metal had been on the decline. Shares of producers often outpace gold on both the upside and downside.

“Our view is that the gold equities are very, very inexpensive relative to bullion,” Bryan said.

Several traders commented that gold was drawing some buying as a safe haven in the aftermath of the early-day freefall in global equities.

“We’ve seen that during the last couple of weeks,” said Phil Flynn, senior market analyst with Price Futures Group. “That’s definitely giving the gold market a little bit of support.”

A New York-based desk trader characterized buying of gold as largely a “knee-jerk” reaction to the sell-off in stocks. However, he also said, the gold market already was in a corrective phase since bottoming below $1,100 an ounce in recent weeks.
Meanwhile, the September U.S. dollar index was down 1.73 points to 93.275.

“Gold is mainly benefitting from the U.S. dollar being biased to the downside,” said Bart Melek, director of commodity strategy for TD Securities. “We saw a big swoosh down in the U.S. currency.”

With the tumble in other markets and concerns about China’s economy, some market participants are becoming more doubtful that the Federal Open Market Committee will hike interest rates next month, Melek said. Such a scenario has unfolded in the past when equities melted down, he added.

“Do they think that this will impact the real economy?” he asked rhetorically. “If the answer is that they are concerned that the real economy is going to be impacted by this risk-off sentiment in the market, they may very well slow down any hike until into 2016. That would be very much a positive story for gold.”

In fact, Melek added, this could enable the metal to reclaim $1,200 an ounce.

For now, however, the high in December gold of $1,169.80 an ounce is only slightly above Friday’s six-week high of $1,167.90 an ounce.

Some market participants are selling the yellow metal in order to raise cash to meet liquidity needs and margin calls as a result of tumbles in other markets, explained George Gero, precious-metals strategist with RBC 
Capital Markets Global Futures, and Frank Lesh, futures analyst with FuturePath Trading.

“You’ve got the pull in gold right now between margin-call liquidation and the safety bid,” Lesh said. “Those are the two considerations at the moment. People are selling something that is liquid.”

A trader commented that such scenarios have played out before, such as during the early part of the financial crisis several years ago, when market participants liquidated profitable positions in gold to cover losses elsewhere.

“It has to do with being an asset (sold) when everybody is looking for cash more than anything,” he said. “But every time is a little bit different, so it’s hard to say.”

The trader added that December gold technically is having trouble moving convincingly above the 100-day moving average, which lies near $1,168. The market has been above this only briefly so far Monday.

Flynn, meanwhile, suggested gold’s inability to rally further also could signal worries about the potential for deflation, especially amid the apparent economic slowdown in China.

“I think the market is trying to balance the safe-haven aspect versus the deflationary aspect we’re seeing coming out of China,” Flynn said.

By Allen Sykora
Monday August 24, 2015 12:13

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