China Buying Supports Gold, For Now

So far this week, we have seen a moderate lift in gold prices, as market speculators look to capitalize on the shorter term declines we have been seeing in recent weeks.  A good deal of attention in the precious metals space has shifted to key emerging market economies like China and India, as these countries have quickly become some of the most active buyers in these assets.  Supportive trends here have kept ETFs like the SPDR Gold Trust ETF (GLD) afloat even during times of weakness, and this week appears to be another example.  

“Last year, China became the world’s largest gold consumer,” said Rick Bartlett, markets analyst at Corner Trader. “This essentially means that commodities traders have become more and more interested in the level of physical buying that occurs in the country.”  This latest round of buying can be described as bargain hunting, as investors most focused on physical assets look to gain exposure in the expectation that the major declines from last year have completed and that the multi-year uptrend that started in 2000 is ready to resume.  

Understanding the Broader Trends

But even with this latest round of buying activity in emerging markets, we must have a solid understanding of the broader trends before we can accurately determine whether or not these moves are justified.  Describing last year’s activity a simple downtrend, would be an understatement.  The bearish activity was widespread and the trends in gold also brought down assets like the iShares Silver Trust ETF (SLV).  The market’s direction in terms of sentiment was more than clear, as gold investors saw losses of as much as 30% in some cases.  

From a technical perspective, GLD has shown some encouraging signs in the early parts of this year.  But When we look at things from a broader perspective, we will need to see a clear break of several more important resistance levels before we can reasonably expect to establish another long term uptrend.  On the topside, it will be critical to see how markets behave near 136 in order to determine whether or not there is sufficient momentum in the market to create a positive performance for the year.  

Correlated Assets

Additionally, traders will need to monitor activities in correlated markets (stocks, other commodities, and currencies).  The easiest way of doing this is to monitor price activity in the PowerShares DB US Dollar Index Bullish ETF (UUP), the SPDR S&P 500 Trust ETF (SPY), and the United States Oil Fund LP ETF (USO).  Since gold is priced in Dollars, gold prices tend to move opposite direction when compared to the greenback.  Similarly, the S&P 500 has a similar effect, given the fact that stocks perform well in risk-seeking environments (gold tends to be favored in risk-averse environments).  Last, the commodities space tends to move in similar directions, as demand levels tend to rise during periods of low volatility and market stability.