Gold prices rose slightly on Monday, recovering from a five-month low hit last week, as investors sought some safe-haven appeal amid concerns over China’s economic slowdown and the outlook for U.S. monetary policy. Copper prices, however, remained muted as a modest interest rate cut by China’s central bank failed to boost demand for the industrial metal.
Gold benefits from risk aversion
Spot gold was up 0.2% at $1,892.68 an ounce by 10:30 GMT, while gold futures expiring in December rose 0.3% to $1,921.95 an ounce. Both instruments were still trading close to their lowest levels since March, as strong U.S. inflation and labor market data had increased the chances of higher interest rates in the near future.
Gold is seen as a hedge against inflation and currency debasement, but higher interest rates raise the opportunity cost of holding the non-yielding metal and boost the dollar, making gold more expensive for holders of other currencies.
The dollar index, which measures the greenback against a basket of six major currencies, was slightly lower on Monday at 103.28, after hitting a six-week high of 103.35 on Friday. The U.S. 10-year Treasury yield was also down at 1.86%, after reaching a 10-month peak of 1.94% last week.
The retreat in the dollar and yields helped gold regain some ground, as investors also sought some safety amid worries over China’s economic health and the impact of the coronavirus delta variant on global growth.
China’s property sector, one of the main drivers of its economy, has been under pressure as one of its largest developers, China Evergrande Group, filed for bankruptcy protection in a U.S. court, adding to fears of a debt crisis in the country. China’s retail sales and industrial output also grew at a slower pace than expected in July, indicating a loss of momentum in the world’s second-largest economy.
China’s central bank responded by cutting its one-year loan prime rate (LPR) by 10 basis points to 3.45% on Monday, while keeping its five-year LPR unchanged at 4.20%. Analysts had expected a bigger cut of at least 15 basis points for both rates, as a signal of more monetary easing to support growth.
Copper flat as China rate cut disappoints
Copper prices showed little reaction to China’s rate cut, as the move suggested that the country had limited room to loosen its policy stance and stimulate demand for the metal. China is the world’s largest consumer of copper, accounting for about half of global demand.
Copper futures were flat at $3.7207 a pound on Monday, after falling for three consecutive weeks on signs of slowing Chinese demand and rising global supply. Copper imports by China dropped sharply in July, as a post-pandemic economic recovery lost steam.
Copper is widely used in construction, manufacturing and power generation, and is considered a barometer of economic activity. Copper prices have surged to record highs this year on expectations of strong demand from green energy and infrastructure projects, but have since retreated as supply bottlenecks eased and demand cooled.
Investors are now awaiting more clues on the direction of U.S. monetary policy from the Jackson Hole Symposium later this week, where Federal Reserve Chair Jerome Powell is expected to deliver a speech on the economic outlook on Friday. Powell’s comments could influence market expectations for the timing and pace of tapering the Fed’s bond-buying program and raising interest rates.
Gold prices could face more pressure if Powell signals that the Fed is ready to start reducing its stimulus soon, while copper prices could benefit from a more dovish tone that supports risk appetite and growth prospects.
