Gold Is Way Down. Here’s When To Worry.

Gold has fallen from its lofty August levels. The precious metal appears to be at a crossroads, but the price likely has to slide more from here in order for investors to get really spooked.

The price of gold ran up 37% between March 15, 2020—roughly when investors were most fearful about the economic damage from the Covid 19 pandemic—and August 2, 2020. That day, gold hit an all-time high of US$2,028, as seen by the Gold Continuous Contract (GC00). Even though stocks rose in that time span, demand for haven assets remained strong, as there weren’t many meaningful signs that the world would soon emerge from the pandemic.

Since hitting a record, the commodity has fallen 9% to date. “The long-term uptrend in gold is teetering on the edge,” wrote Jason Goepfert, founder of Sundial Capital Research in a note.

While gold has been in a concerning downtrend of late, gold-related stocks offer some optimism for the precious metal. Gold mining stocks are typically correlated with the actual commodity price. As an example, Goepfert highlights the VanEck Vectors Gold Miners ETF (GDX), which has largely echoed gold’s moves over the past year. The ETF rose more than twofold between mid-March and early August, before falling 20% from the August level to date.

But now gold mining stocks suggest there could be brighter days ahead for the commodity. Roughly 20% of gold mining stocks have been trading above their 200-day moving averages on most days in the past two weeks, down from more than 85% of those stocks recently, Goepfert said. This cycle has occurred several times in the past few years and usually precedes gains for most gold stocks in the coming three-month period, Goepfert says.

Even if gold price trends cannot reverse themselves, it likely isn’t time to get too bearish yet. The key price level to watch for the contract for the actual metal is US$1780, according to Sevens Report Research. A dip below that would be a negative signal, representing a double-digit percentage drop from the current level. Gold dropped to around that level in late November, but quickly popped back.

Gold may be at a fork in the road, but investors might not want to unload their gold holdings just yet.

China’s economic recovery isn’t gaining the momentum money managers are awaiting.

Data from China Beige Book show that the economic green shoots glimpsed in August didn’t sprout further in September. Job growth and consumer spending faltered, while orders for exports came in at the lowest level since March, according to a monthly flash survey of more than 1,300 companies the independent research firm released Thursday evening.

Consumers’ initial revenge spending after Covid restrictions eased could be waning, the results indicate, with the biggest pullbacks in food and luxury items. While travel remains a bright spot ahead of the country’s Mid-Autumn Festival, hospitality firms and chain restaurants saw a sharp decline in sales, according to the survey.

And although policy makers have shown their willingness to stabilise the property market, the data showed another month of slower sales and lower prices in both the residential and commercial sectors.

Even more troubling are the continued problems at Evergrande Group, which has scuttled a plan to restructure itself, raising the risk of a liquidation that could further destabilise the property market and hit confidence about the economy. The embattled developer said it was notified that the company’s chairman Hui Ka Yan, who is under police watch, is suspected of committing criminal offences.

Nicole Kornitzer, who manages the $750 million Buffalo International Fund (ticker: BUIIX), worries about a “recession of expectations” as confidence continues to take a hit, discouraging people and businesses from spending. Kornitzer has only a fraction of the fund’s assets in China at the moment.

Before allocating more to China, Kornitzer said, she needs to see at least a couple quarters of improvement in spending, with consumption broadening beyond travel and dining out. Signs of stabilisation in the housing market would be encouraging as well, she said.

She isn’t alone in her concern about spending. Vivian Lin Thurston, manager for William Blair’s emerging markets and China strategies, said confidence among both consumers and small- and medium-enterprises is still suffering.

“Everyone is still out and about but they don’t buy as much or buy lower-priced goods so retail sales aren’t recovering as strongly and lower-income consumers are still under pressure because their employment and income aren’t back to pre-COVID levels,” said Thurston, who just returned from a visit to China.

“A lot of small- and medium- enterprises are struggling to stay afloat and are definitely taking a wait-and-see approach on whether they can expand. A lot went out of business during Covid and aren’t back yet. So far the stimulus measures have been anemic.”

Beijing needs to do more, especially to stabilise the property sector, Thurston said. The view on the ground is that more help could come in the fourth quarter—or once the Federal Reserve is done raising rates.

The fact that the Fed is raising rates while Beijing is cutting them is already putting pressure on the renminbi. If policy makers in China wait until the Fed is done, that would alleviate one source of pressure before their fiscal stimulus adds its own.