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After selling off $50 last week, gold is stepping up its safe-haven play as investors look for hedges amid Evergrande volatility.
On Tuesday, gold saw double-digit gains triggered by a global equity selloff that boosted risk-off sentiment among investors. December Comex gold futures were last trading at $1,780.40, up nearly 1% on the day.
When news of Evergrande, the prominent Chinese property developer, broke, there was no significant impact on precious metals. But things have changed since then, said MKS PAMP GROUP head of metals strategy Nicky Shiels.
"It's triggered a broad-based based selloff in U.S. equities (largest 1day slide since October 2020) … 'Macro fear' has been woken with this Evergrande/Chinese property crisis now intensifying (knock-on effects - Chinese Property Developer Sinic halted trading after plummeting 87% in a day!) - so we have an Asian "grey swan" that is still not resolved but its another excuse to lighten up risk exposure," Shiels said.
With the world's most indebted real estate developer, Evergrande, due to make interest payments of $84 million on its bonds on Thursday, things are only heating up. Investors are most worried about the contagion effect.
"Ultimately, while the markets are focused on China's overregulation (of everything from internet stocks to the commodities sector to the ultrawealthy), the escalating concerns around Evergrande highlights an even structural issue - the large-scale malinvestment over many years (since 2009) leading to ghost cities, which is coming back to haunt investors/markets now, Shiels described.
This uncertainty has triggered a search for safe-haven plays, which is why the precious metal is seeing this increased interest this week.
"The overreach for havens was thus warranted; from U.S. Treasuries (10yr yields fell from 1.38% to 1.3%), to the US$ (edging toward key s/t ceiling at ~93.50) and gold (which managed to not only hold up in the face of widespread deleveraging, but closed up on the day," Shiels said commenting on gold's price action on Monday.
This is a significant shift for the precious metal, which dropped into "no man's land" last week after falling from $1,807 to $1,750 an ounce.
"Gold has been a frustrating letdown (it didn't show up when opportunities arose this summer)," Shiels noted. [The yellow metal's] strength indicates some true safe-haven bids that have been missing for a while."
If gold can manage to hold its gains, that could mark a shift in its recent disappointing trading pattern. "This newfound relative gold strength (IF it holds!) is notable and would mark the 2nd time this year (the previous time was the August 18/19th equity pullback) it showed up as a safe haven," Shiels explained.
The two biggest downside risks for gold going forward is a strong rebound in the U.S. dollar and a selloff of gold ETFs. "The unwind of equities risks a simultaneous unwind of Gold ETF exposure). Gold is a safe haven only once the dust settles, hardly during it," Shiels added.
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By Anna Golubova
For Kitco News
