Gold Sits at Strong Resistance Level

Despite a very small bounce on Friday, US stock markets closed lower for the week amid concerns about North Korea. Furthermore, it was revealed that president Trump intends to order an investigation into Chinese trade practice, specifically their intellectual property policies for US companies operating in China. Trump believes China's trade practices are unfair and are disadvantageous to the US but he is having a hard time doing anything about it as the risk of retaliation by China is high.

Gold closed the week on a high and is now at a strong resistance level. A break above US$1,295-$1,300 could open the way to a run higher to around US$1,375. Gold is certainly benefiting from the current geo-political tensions but it is also benefiting from a weak US dollar. As it is priced in US dollars, a weak dollar makes the metal cheaper for foreigners to buy and therefore boosts demand. The US dollar index, which measures the dollar against a basket of currencies, is currently at a more than one-year low and did not rally despite the risk-off sentiment that prevailed last week. The US dollar would usually be a safe haven currency so the fact that it didn't benefit from safe haven flows last week is a sign of its underlying weakness. The weak US dollar has propelled the Aussie dollar to its current relatively strong levels at around $0.79.

Iron ore prices came off slightly last week after a steady rally over the past two months has added around $20 per tonne to the price which brings it 40% higher than the lows reached in mid-June. While the price of $73 per tonne is still off the highs reached in February of this year, it is at a level that makes Australia's big iron ore mines very profitable. Fortescue metals (FMG), for example, has cash costs of around $12 per tonne, thus giving the miner a very healthy margin. 

       

Data Releases:

–   Chinese Industrial Production 12:00pm AEST

To view the Rivkin economic calendar and Local Markets matrix, members can click here.

This article was written by William O'Loughlin – Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via [email protected] or by phoning +612 8302 3633.