China's Market Gains Poised to Help or Hurt Gold Prices?

After getting stopped near the $1,746 resistance line with the onset of decent news from Asia, gold prices remain unhindered.

Gold was relatively stable without any major movement on Tuesday, which is not surprising considering the fact that it already posted its largest monthly gain since August, including an 11% gain in the first month of 2012. But what probably didn't help gold prices very much was the slight advance made in most Asian markets. China's Purchasing Managers Index experienced an unexpected increase to 50.5 in January following 50.3 in December, while economists had generally expected a drop to 49.5.

It may not seem like much opposition to gold, but considering the fact that China's previously touted "slowing expansion" may have sent many of its investors rushing towards gold as a safe haven, this bit of good news may have encouraged gold holders to take profit and start delving into riskier stock investments. Both China's Shanghai Composite Index and Japan's Nikkei Stock Average rose 0.2%, while South Korea's Kospi gained 0.3%.

Of course, this doesn't mean that gold's bull has run out of steam. As mentioned in previous articles, most of gold's rise above $1,700 an ounce was attributed to the Federal Open Market Committee (FOMC) suggesting that it intends to keep interest rates at “exceptionally low levels” until late 2014. That agreement hasn't changed and can thus serve as a sort of lasting support for bullish gain throughout this entire year. Frankly, I was actually quite elated to see that such signs of improvement in China didn't cause any major losses for gold, which is a key indication of the yellow metal's resilience - even near a resistance level.

Ting Lu, a China economist at Bank of America Merrill Lynch, also brings up an interesting interpretive argument: “Though this reading is quite supportive of our soft landing call....China’s monthly macro data in Jan and Feb are significantly distorted by the different timing of the Chinese New Year holiday.” This observation could explain why most gold investors seemed relatively unimpressed by such good news from the East, but either way, resilience is resilience and that makes me quite happy.

Personally, I think that the relationship between China and gold prices is almost...contradicting. Whereas news of a slowing or nonexistent expansion may have sent droves of Asian investors towards gold, I think that news of expansion and improvement in China contributes to a chain reaction whereby all manner of raw materials and metals will be required to prop up these economic advances and such demand can ALSO drive precious metal prices up. Rio Tinto Group, the world’s third-largest mining company, and Anglo American Plc said last week China’s growth will remain resilient to a contraction in Europe, underpinning a long-term expansion in demand for raw materials.

Whether Chinese expansion rates are for or against gold prices may be a moot question given the obvious fact that news on 'actual Chinese demand for gold' will supersede either angle. But if both angles are indeed in opposition, then they may create a sort of zero sum gain tug-of-war while watching the Euro zone for more action and influence on the yellow metal.

More major news out of Europe is due later this morning and throughout the week, and I'm VERY interested in seeing what effects they will create...

Be safe, be wealthy and above all else, be happy.

- Mitch

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