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China Downgrade Worrying Investors This Week and Gold Looks Resilient

28 May
Shanghai Stock Exchange

China Downgrade Worrying Investors This Week and Gold Looks Resilient

Gold Market Discussion

China Downgrade Worrying Investors As the Country’s Financial Strength in Question

Gold had another strong week, and looks like it is moving out of its recent sluggishness. With Moody’s China downgrade worrying investors this week, the dollar continuing to show weakness, and a possible rate hike, gold is looking attractive and shows signs that it will go up from here.

The China downgrade worrying investors is Moody’s Investment Services’ decision this week to downgrade China’s sovereign debt a notch. China – the world’s second largest economy – has been touting the narrative that its economy is robust. It’s massive, ballooning debt, which led to this downgrade, says otherwise. Government-led stimulus spending in the way of overly ambitious infrastructure projects is one reason for the country’s current struggles. China’s central bank has also pumped such a supply of money into the economy that it makes U.S. and European central banks look restrained in comparison. Furthermore, the speed at which China has accumulated so much debt is perhaps even more troubling.

What this means for investors: The global system will certainly feel the repercussions of China’s monetary experiment. Their system is awash with excess cash. China is also one of the largest global consumers of gold. It is no surprise that the Chinese central bank is currently the largest buyer of gold given their fragile economic state.

Gold Appears to be Coming Out of Slump 

Gold Eagles- BullionLast week gold broke over the  $1,250 again, and this week it continues to show positive signs of resiliency. The dollar index’s strength was weakening last week, and continues to show pull back this week. Traditionally a weak dollar and gold prices are inversely correlated, meaning this is a strong indicator that gold is going to continue to make gains. This week’s gains pushed gold’s 50-day moving average price above the price average of the last 200 days. This is also generally a strong technical indicator that the asset is expected to continue to perform well.

What this means for investors: Gold was over $1,260 going into the three day weekend. Take advantage of the bullish signals gold is sending to protect your wealth now. Investors who bought a few weeks ago on the pull back are especially glad they did now, given the growing uncertainty going forward.

Secretary Treasury Mnuchin Petitions Congress to Raise Debt Limit

Mnuchin swears in
Secretary Mnuchin Swears In

Steve Mnuchin urged Congress this week to vote to raise the debt ceiling before recessing for the summer. This means that the $19.8 trillion limit on the debt is still not sufficient to cap the extraordinary spending by the Federal government.

I’ve brought up this potential debt crisis in past Gold Market Discussions. The U.S. is already over $14 trillion in debt, and paid $500 billion in interest alone servicing this debt last year.

What this means for investors: A country cannot sustain itself forever on such a massive deficit created through fiat money. Gold will always be a safe fall back when the money manipulation becomes reaches its breaking point.

Federal Reserve Looking Cautiously at Rate Hike

This week, the Federal Reserve released the minutes of this month’s earlier meeting. They indicated that there will be a June rate hike, but have taken a more cautious tone than they have recently. Gold prices got a boost immediately following the news, as the Fed’s more dovish tone stemmed from the recent economic slowdown.

What this means for investors: Traditionally, higher interest rates should mean lower gold, as it is not an interest bearing asset. However the prospective hike is giving the markets shivers. If the Fed’s reservations about the economy’s strength are founded, expect gold to continue to climb.

 

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 Here are some articles from the web discussing the topics in this week’s post:

China Downgrade Worrying Investors As the Country’s Financial Strength in Question

Read Here

Gold Appears to be Coming out of Slump

Read Here

Secretary Treasury Mnuchin Petitions Congress to Raise Debt Limit

Read Here

Federal Reserve Looking Cautiously at Rate Hike

Read Here

 


As always, I encourage you to speak with your broker at RME for more market updates. Expert brokers are available Monday-Friday from 9 AM- 5 PM or by special appointment after hours. Call today at  602-955-6500 or toll-free at 877-354-4040.

“I’ll be keeping a sharp eye on the market and I encourage you to do the same!”

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