Gold slipped to a new two-week low of 1230.85 in overseas trading, but quickly rebounded to challenge seven-week highs at 1267.80. Gold was lifted by heightened risk aversion, a drop in the dollar and rumors that India might ease it’s import restrictions on gold.
The China Factor
A drop in China’s Markit/HSBC PMI to 49.6 in January got the day off to a bad start. It was the first contraction in the manufacturing sector in six months, stemming from both weaker domestic and export demand. This not only bodes ill for China, but it results in heightened growth risks for the global economy as well.
As Asian stock and bond markets slid, heightened risk aversion pushed investors into the yen initially, which weighed on the dollar. Better PMI readings for the eurozone and Germany, diminished expectations that another ECB rate cut was imminent, boosting the euro. That put further pressure on the dollar, which in turn buoyed gold.
Dismal Outlook
While some of the data suggest the recovery in Europe may be gaining momentum, 2014 GDP forecasts are still pretty dismal, just around 1%. What was reinforced in the data was that France continues to struggle comparatively. Flash manufacturing PMI for France came in at 48.8, better than the 47.0 read in December, but still well in contraction territory.
As one might expect, French-German yield spreads widened significantly. Markit called it the “worst day of the year for credit markets,” noting specifically that Chinese CDS spreads were trading at 97bps, 30bps wider than 2 months ago.
In keeping with the risk aversion theme, the yield on U.S. 10-year Treasuries tumbled 10 bps to 2.77%. This may reflect some renewed expectations that the Fed will hold off on any further tapering at the FOMC meeting next week.
Safe Haven Of Choice
Of course gold remains the safe-haven of choice when other options, such as the yen and dollar, are being purposefully debased. And unlike Treasuries, Bunds or JGBs, the yellow metal — when bought in physical form and held in the possession of the owner — has no counter-party risk.
Finally, there where reports earlier in the session, attributed to an interview by Congress party chief Sonia Gandhi, that India would look to ease oppressive import restrictions on gold. A cut to, or removal of, the 10% import duty on gold would likely release considerable pent-up demand for gold in India. While that story was subsequently refuted by Indian Finance Minister Chidambaram, gold didn’t really seem to care.