Gold prices ekes out amid Risk-ON as the Chinese market tremors

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While June was a brutal month for gold, July has painted a different picture: the FED has gone out of their way to demonstrate how dovish they are, and they appear to be extremely hesitant in policy normalisation anytime soon, despite high-flying inflation numbers. Some investors are concerned that the rapidly spreading Delta variant of the coronavirus could hamper global economic recovery at a time when inflation in nations like the United States has increased faster than expected. A delayed economic recovery and growing price pressures would complicate monetary policy and compel central banks to strike a compromise between boosting growth and containing price rises.

Meanwhile, the total market value of Big Chinese tech firms fell by hundreds of billions of dollars in July, showing growing investor anxiety about how the industry would fair under Beijing’s bombardment of regulatory pressure. Shares of Alibaba Group Holding Ltd., Kuaishou Technology, Meituan, and Tencent Holdings Ltd. alone lost $344 billion in market value in July, or almost 20% of their total worth. Chinese equities listed in the United States have also fallen. Pinduoduo Inc., an e-commerce expert, had plummeted roughly 28% in July, while KE Holdings Inc. had lost more than half its value. The Nasdaq Golden Dragon China Index has dropped 22% in July.

Global investors are concerned about two long-term issues: whether foreign purchasers will still be allowed to participate in Chinese firms and the future of Chinese equities listed overseas. The first concern is with Variable-Interest Entities, or VIEs. This is a common legal structure used by Chinese firms to obtain cash overseas, but it has recently come under scrutiny. Recent tutoring restrictions has expressly prohibited foreign investment in the industry, including the use of VIEs.

The second issue relates to delisting risk. The U.S. has threatened to eventually remove Chinese companies from U.S. exchanges if regulators can’t see their audit The second issue is the risk of delisting. The US has threatened to delist Chinese firms from US markets if authorities are unable to view their audit documents, but China is hesitant of releasing such information, mainly for cybersecurity concerns. Some of these concerns have been fueled by the difficulties confronting ride-hailing powerhouse Didi Global Inc. In July, just after the firm went public in the United States, Chinese officials started a cybersecurity investigation into it. Soon after, China said that it would increase its examination of foreign-listed firms and those looking to sell shares abroad. With the fall in Chinese stock prices, gold prices appear to be higher, creating risk aversion. The Risk-On sentiment has evolved due to tensions between US and China.

Bullion prices are beginning to wake up in what should be one of the most favourable fundamental conditions in recent history. This is significant in Gold since the dovish Fed rhetoric during July helped prices retrace 50% of the June sell-off. The 50% level of the previous significant rise served as resistance in mid-month, and again last week after Powell spoke as part of the FED’s July rate decision.

COMEX Gold Daily Chart

While gold prices may have exited the ‘technical woods,’ a rise through $1835/40 would indicate that the technical posture has shifted to the bullish side. Gold prices are seeking to break through the falling channel measured against the swing highs of August 2020 and January 2021, but have been blocked by a cluster of Fibonacci levels in the low-1830s. Nonetheless, the price is approaching several significant technical objectives. The first is a 50% retracement of the decline from the June high to the July low. The price for that level is $1835. A break above this level would enhance the technical bullish stance towards $1850 and $1900.

You may also like to read: Ballooning Debt, Quantitative Easing tend to lift Gold prices

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