Gold Shines Amidst China's Growth Scare

China is expected to report that its economy continued to weaken, as its currency slid to levels not seen since the financial crisis of 2008 and the PBOC is set to meet on how to support the economy.

The Phantom Rebound

Wednesday is a key date for markets that depend on China, as there will be a wealth of data being released by the Asian giant. Perhaps the most important of the releases will be Q3 GDP figures, the first of the major economies to provide figures for the quarter that just ended. Analysts and institutional forecasters have once again cut China's economic growth outlook, expecting it to contribute to a global slowdown this year. The largest economy in Asia has been facing capital outflows as it struggles to restart its housing market, deal with low inflation and face deflation.

People have been worried about the economic situation in China all summer, which has prompted a surge in retail gold buying in China as a store of value. They are not alone, as the Chinese central bank also continues its gold-buying spree, leading analysts to suggest that the massive demand from the Asian giant has caused a paradigm shift in bullion. The price differential between how much gold costs on the domestic Chinese market and offshore appears to support the trend as the PBOC continues to set the yuan rate at odds with the market.

An Eager Appetite and Data Outlook

Usually, as interest rates rise, the price of gold declines. But that hasn't been the case lately, thanks partly due to the increased demand from China; the other more recent part being risk aversion from the war in Gaza and following a 6-month low on expectations or higher rates. How sustainable actual gold demand will be could likely come down to how resilient the Chinese economy is so its citizens can keep affording to buy the precious metal. The economy is expected to grow 0.9% in the third quarter, which would be a pick-up in the pace from the 0.8% reported in the second quarter. But annual growth is expected to pump the brakes hard, coming down to 4.6% compared to 6.3% previously. That's particularly relevant for the global outlook, as China's third quarter typically sees growth due to anticipatory activity ahead of year-end sales in Europe and the US.

Earlier this week, the PBOC increased its liquidity supply by injecting 289B yuan into the banking system as part of its regular MLF loan rollover. The central bank has to walk the difference between easing to support the economy but not hurt the currency in the face of other central banks raising rates to stave off inflation. The central government is reported to be considering another round of stimulus to boost the economy. Meanwhile, industrial production growth is expected to slow to 4.3% from 4.5% in the prior month.

Waiting for the Short-Term Breakout

Recent price action from early October shows gold putting a low in at the 138.2% reverse Fibonaci of the $2085-$1900 leg at $1825 an ounce. It follows a drop instigated by a triangle breakout. Recapturing the breakdown swing low of $1920 raises the chances of further upside, but without control of the higher swing at $1970, gold's short-term price action remains somewhat consolidating.

If bulls can defend the round support, a move past $1980 could see prices extending to the 2k handle should $1945 give way. Conversely, sliding under $1920 could encourage bearish PA, eventually reaching $1880/oz.

Source: SpreadEx / GOLD

Key Takeaways

China's economy is expected to weaken, with Q3 GDP growth projected at 0.9%. Softening economic conditions have generally led to increased retail gold buying in China as a safe haven investment. The Chinese central bank has also been buying gold, resulting in a shift in bullion demand. The PBOC is set to meet to discuss how to support the economy amid capital outflows, a struggling housing market, and low inflation following the GDP release, as it tries to balance easing measures without negatively impacting the currency.